by Calculated Risk on 11/20/2008 10:19:00 AM

The three month LIBOR declined slightly to 2.15% from 2.17%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (slightly better)

The yield on 3 month treasuries increased to 0.01% from 0.1054%. (worse). Essentially zero - flight to quality!

The 10-Year Treasury Note yield is at 3.14%.

The effective Fed Funds rate was at 0.38% (yesterday). At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%) and the 3 month yield within 25 bps of the target rate.

But for now, the Fed appears engaged in quantitative easing.

The TED spread: 2.09. (unchanged)

The TED spread is stuck above 2.0, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5.

The two year swap spread from Bloomberg: 103.0, down slightly from 105.30 (unchanged). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

Spreads between 30 Year Corporate and Treasury Yields

This 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

There are periods when the spread increases because of concerns of higher default rates (like in the severe recession of the early '80s), but the recent spread is unprecedented. Worse

Weekly Fed Balance Sheet (updated weekly on Thursday afternoon)

The Federal Reserve assets increased $139 billion last week to $2.214 trillion.

The A2P2 spread increased to 4.83 from 4.65 (Worse). New record high for this cycle!

This is the spread between high and low quality 30 day nonfinancial commercial paper.

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.43% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. Also the recession is creating concern for lower rated paper. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

Note:on quantitative easing, see Bernanke's paper from 2004: Conducting Monetary Policy at Very Low Short-Term Interest Rates One thing is clear - the target Fed funds rate is pretty much meaningless right now.

by Calculated Risk on 11/20/2008 09:29:00 AM

From Bloomberg: Bond Risk Soars to Record as Markets Return to ‘Crisis Mode’ (hat tip Justin)

The cost of protecting corporate bonds from default surged to records around the world as the prospect of U.S. automakers filing for bankruptcy protection fueled concern of more bank losses and a deeper recession.

“Markets are back in crisis mode,” said Agnes Kitzmueller, a Munich-based credit strategist at UniCredit SpA, Italy’s biggest bank. “There is fear in the market.”

Click on cartoon for larger image in new window. This cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA. was inspired by Professor Duy's post last night: Fed Watch: Policy Adrift

by Calculated Risk on 11/20/2008 09:13:00 AM

From MarketWatch: GMAC moves to tap government funding

GMAC LLC, the financial arm of General Motors Corp., said Thursday that it has applied to become a bank-holding company so it can access some of the emergency cash available through the U.S. Treasury's Capital Purchase Program.

by Calculated Risk on 11/20/2008 09:02:00 AM

It was just six months ago that continued claims hit 3 million; that was a big story. Now continued claims are over 4 million ...

The DOL reports on weekly unemployment insurance claims:

In the week ending Nov. 15, the advance figure for seasonally adjusted initial claims was 542,000, an increase of 27,000 from the previous week's revised figure of 515,000. The 4-week moving average was 506,500, an increase of 15,750 from the previous week's revised average of 490,750.
...
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 8 was 4,012,000, an increase of 109,000 from the preceding week's revised level of 3,903,000.

Click on graph for larger image in new window.

The first graph shows weekly claims. The four moving average is at 506,500. This is a very high level, and indicates significant weakness in the labor market.

Continued claims are now at 4.012 million, the highest level since 1982.

The second graph shows continued claims since 1989.

Note: Continued claims hit 4.7 million during the 1982 recession (not shown), although the population was much smaller then. The unemployment rate peaked at 10.8% in 1982 (compared to 6.5% currently).

This suggests that November will be another very weak month for employment.

by Calculated Risk on 11/20/2008 01:31:00 AM

Professor Tim Duy takes a hard look at Bernanke Fed Watch: Policy Adrift

I understand the Federal Reserve Chairman Ben Bernanke is considered something of a sacred cow, our one point of light in an uncertain world. An academic who cannot be questioned by other academics. A smart person who has mastered the Great Depression and therefore “knows” what to do, and is providing the leadership to do it.

I am beginning to question all of these assumptions.

... for now, I see a distinct lack of leadership from the Federal Reserve, and it suggests that Bernanke has used up his bag of tricks. And I don’t think that he knows what to do next. Indeed, Fedspeak is now littered with confusing statements that leave the true policy of the Federal Reserve in question.

Read it all ...

by Calculated Risk on 11/20/2008 01:18:00 AM

"The FOMC for many years has instructed the open market desk at the New York Fed to keep the actual Fed Funds rate close to the target Fed Funds rate. Clearly in recent weeks, it is not succeeding. As far as I can tell, it can't be trying."
William Poole, former President of Fed Bank of St. Louis

From Bloomberg: Bernanke's Cash Injections Risk Eclipse of Main Rate

``There has been a policy shift, but the Fed is not transparently announcing what it is doing and why,'' said former St. Louis Fed President William Poole, now a senior fellow at Cato. ``Monetary policy works best when the markets understand what the central bank is doing.''
...
``It is a move to quantitative easing, to force lots and lots of reserves into the banking system with the expectation that banks will start to trade them for a higher-yielding asset,'' said Poole, a Bloomberg contributor

Click image for video. Poole Sees Evidence of Unannounced Policy Shift at Fed (Source: Bloomberg)

by Calculated Risk on 11/19/2008 11:45:00 PM

General Growth Properties, the second largest mall owner in the U.S. behind Simon Property, has hired bankruptcy counsel ...

From the WSJ: Mall Owner Lines Up Bankruptcy Law Firm (hat tip crispy&cole)

Debt-laden mall giant General Growth Properties Inc. has hired the law firm Sidley Austin as bankruptcy counsel ... The move doesn't mean a Chapter 11 filing is imminent.
...
The company, which owns more than 200 U.S. malls, has struggled to repay debt it amassed during an acquisition binge near the market's peak.

by Calculated Risk on 11/19/2008 08:55:00 PM

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

Travel on all roads and streets changed by -4.4% (-10.7 billion vehicle miles) for September 2008 as compared with September 2007. Travel for the month is estimated to be 232.8 billion vehicle miles.

Click on graph for larger image in new window.

This graph shows the annual change in the rolling 12 month average of U.S. vehicles miles driven. Note: the rolling 12 month average is used to remove noise and seasonality.

By this measure, vehicle miles driven are off 3.0% YoY, and the decline in miles driven is worse than during the early '70s oil crisis - and about the same as the 1979-1980 decline. As the DOT noted, miles in September 2008 were 4.4% less than September 2007, so the YoY change in the rolling average will probably get worse.

The second graph shows the weekly U.S. gasoline prices from the EIA. This shows that gasoline prices really declined in October - but prices in September were still over $3.50 per gallon. So we will have to wait for the October vehicle miles report to see the impact of sharply lower gasoline prices.

Lower gasoline prices should mean more vehicle miles driven, but the weakening economy might offset the impact from lower prices.

by Calculated Risk on 11/19/2008 06:41:00 PM

Click on graph for larger image in new window.

Doug Short of dshort.com (financial planner) sent me this graph of "Four Bad Bears".

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

Interesting times ...

by Calculated Risk on 11/19/2008 05:31:00 PM

A couple of quotes from Bloomberg: Commercial mortgages seen at risk as economy weakens (hat tip Dwight)

"There is a growing concern that (commercial real estate) is going to be another tripping point in the economy."
William Larkin, portfolio manager with Cabot Money Management

"The mall operators are really, really in trouble. There aren't even signs on the empty stores in the malls. They've been empty for a while, barren, tumbleweeds blowing through."
Kevin Quinn, a managing director of equity trading at Stanford Group Company

And here is a forecast of office vacancy rates increasing significantly in Chicago via the Chicago Tribune: Chicago's commercial real estate climate may soon grow colder. (hat tip Walt) A few excerpts:

With banks and investment firms occupying 12 million square feet of office space, consolidation and downsizing could push the downtown vacancy rate from 12 percent to nearly 18 percent by 2010.
...
Commercial real estate faces one of its most challenging climates in nearly two decades.
...
"I think we could easily see an effective drop in rents over the next 12 months of 15 to 20 percent from where they are today." [said John Goodman, Chicago-based executive vice president with Studley, a real estate firm]

This story is playing out all over the country.

There are a couple of key points:

as vacancies are rising, rents are falling - and any commercial loan based on a overly optimistic (added) "pro forma" analysis is in jeopardy of default.

new non-residential investment in offices, malls and hotels will slow sharply.

As example, in Chicago there are several new buildings just being finished:

Adding to the vacancies, three major developments are due for completion next year, flooding downtown Chicago with another 3.6 million square feet of office space.

But the good news for landlords - and bad news for construction related businesses - is there are "no new office buildings on the horizon for 2010 and only one ... planned for 2011." This fits with the Architecture Billings Index released earlier today.

by Calculated Risk on 11/19/2008 04:01:00 PM

DOW at 7997

S&P 500 at 806.7

NASDAQ at 1386

Update: Overheard on the trading floor ...

"I don't want the cheese anymore... I just want out of the trap."

"This is like a half off sale at Nordstrom ... it is still overpriced!"

by Calculated Risk on 11/19/2008 02:15:00 PM

Click on graph for larger image in new window.

This is an update to a graph that Will sent me comparing four stock market crashes.

Note: updated with intra-day prices with S&P 500 at 828.

This is an epic crash, and I'll add the Great Depression soon.

by Calculated Risk on 11/19/2008 01:19:00 PM

The American Institute of Architects reports: Architecture Billings Index Drops to All Time Low

Click on graph for larger image in new window.

On the heels of a six-point drop in September, the Architecture Billings Index (ABI) plummeted to its lowest level since the survey began in 1995. 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 October ABI rating was 36.2, down significantly from the 41.4 mark in September (any score above 50 indicates an increase in billings). The inquiries for new projects score was 39.9, also a historic low point.

“Until recently, the institutional sector had been somewhat insulated from the deteriorating conditions affecting the commercial and residential markets,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Now we are seeing that governments and nonprofit agencies are having difficulties getting bonds approved to finance large scale education and healthcare facilities, furthering the weak conditions across the construction industry.”
emphasis added

This is the 2nd leg down for the index this year. There is "an approximate nine to twelve month lag time between architecture billings and construction spending", so we should expect the first decline in architecture billing to impact non-residential structure investment in Q4 2008, and a further downturn in non-residential construction activity next summer.

by Calculated Risk on 11/19/2008 12:35:00 PM

by Calculated Risk on 11/19/2008 10:55:00 AM

It seems these indicators are stuck ...

The three month LIBOR declined slightly to 2.17% from 2.22%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (slightly better)

The yield on 3 month treasuries increased to 0.105% from 0.14%. (worse). Close to zero again!

With the effective Fed Funds rate at 0.37% (as of yesterday), this is probably somewhat in the right range. At some point, I'd like to see the effective Fed funds rate close to the target rate (currently 1.0%) and the 3 month yield within 25 bps of the target rate.

But for now, the Fed is engaged in quantitative easing.

The TED spread: 2.07, down slightly from 2.10 (unchanged)

The TED spread is stuck above 2.0, and still too high. The peak was 4.63 on Oct 10th. I'd like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5.

The two year swap spread from Bloomberg: 105.30, up slightly from 104.25 (unchanged). This spread peaked at near 165 in early October, so there has been significant progress, but I'd like to see this below 100.

Weekly Fed Balance Sheet (updated weekly on Thursday)

The Federal Reserve assets increased $139 billion last week to $2.214 trillion.

The A2P2 spread increased to 4.65 from 4.42, just below the peak of 4.72 two weeks ago. (Worse).

Click on graph for larger image in new window.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

The Fed is buying higher quality commercial paper (CP) and this is pushing down the yield on this paper (0.45% yesterday!) - and increasing the spread between AA and A2/P2 CP. So this indicator has been a little misleading. Also the recession is creating concern for lower rated paper. Still, if the credit crisis eases, I'd expect a significant decline in this spread.

Note:on quantitative easing, see Bernanke's paper from 2004: Conducting Monetary Policy at Very Low Short-Term Interest Rates One thing is clear - the target Fed funds rate is pretty much meaningless right now.

Another day with no improvement ...

by Calculated Risk on 11/19/2008 08:53:00 AM

From the WSJ: CMBS Market Begins to Show Fissures

The market for debt used to finance hotels, offices and shopping malls tumbled Tuesday on worries that the long-feared rise in defaults for commercial mortgage-backed securities had begun, possibly ushering in the next phase of the financial crisis.
...
The news comes as defaults on commercial mortgages are starting to rise. According to a Citigroup Inc. report, the overall number of commercial mortgages packaged into securities that are 30 days or more past due rose to 0.64% in October from 0.39% at the end of last year, with most of the increase coming in October. The latest figure, though low by historic standards, marked the highest delinquency rate in two years.

This article discusses the Westin Portfolio and The Promenade Shops loans (see here for more).

Sure enough - all of the CMBX indices are setting new record lows again.

Click on graph for larger image in new window.

Here is a graph from Markit of the CMBX-NA-AAA 4 mentioned in the WSJ.

The CMBX is a CMBS (Commercial Mortgage-Backed Securities) credit default index just like the ABX - except up is down for the CMBX indices. The CMBX is quoted as spreads, whereas ABX is quoted as bond prices. When the spreads increase - chart going up - the bond prices are going down.

by Calculated Risk on 11/19/2008 08:29:00 AM

Total housing starts were at 791 thousand (SAAR) in October, the lowest level since the Census Bureau began tracking housing starts in 1959.

Single-family starts were at 531 thousand in October; the lowest level since October 1981. Single-family permits were at 460 thousand in October, suggesting single family starts will fall even further next month.

Here is the Census Bureau reports on housing Permits, Starts and Completions.

Building permits decreased:

Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 708,000. This is 12.0 percent below the revised September rate of 805,000 and is 40.1 percent below the revised October 2007 estimate of 1,182,000.

Single-family authorizations in October were at a rate of 460,000; this is 14.5 percent below the September figure of 538,000.

On housing starts:

Privately-owned housing starts in October were at a seasonally adjusted annual rate of 791,000. This is 4.5 percent below the revised September estimate of 828,000 and is 38.0 percent below the revised October 2007 rate of 1,275,000.

Single-family housing starts in October were at a rate of 531,000; this is 3.3 percent below the September figure of 549,000.

And on completions:

Privately-owned housing completions in October were at a seasonally adjusted annual rate of 1,043,000. This is 10.2 percent below the revised September estimate of 1,161,000 and is 25.6 percent below the revised October 2007 rate of 1,401,000.

Single-family housing completions in October were at a rate of 760,000; this is 7.7 percent below the September figure of 823,000.

Notice that single-family completions are significantly higher than single-family starts. This is important because residential construction employment tends to follow completions, and completions will decline sharply soon.

Click on graph for larger image in new window.

Total housing starts were at an annual pace of 791 thousand units in October, the lowest rate on record.

Starts for single family structures (531 thousand) were the lowest since Oct 1981. The Census Bureau has been tracking starts since Jan 1959, and the lowest month for single family structures was Oct 1981 (523 thousand units SAAR) - so it is possible that a new record low will be set in November 2008.

by Calculated Risk on 11/19/2008 12:09:00 AM

From the LA Times: FDIC to open temporary office in Irvine (hat tip jb)

The Federal Deposit Insurance Corp. has leased 200,000 square feet of space in Irvine for a temporary office that will manage receiverships and liquidate assets from failed financial institutions in the western United States.
...
In choosing Irvine, the agency is benefiting from Orange County's depressed office market, which has been hurt by the collapse in recent years of New Century Financial Corp., Ameriquest Mortgage Co. and other financial companies.

The office vacancy rate in Orange County soared to 17.4% in the third quarter from 12.1% a year earlier, while rents fell 4.4%, according to Cushman & Wakefield.

by Calculated Risk on 11/18/2008 07:15:00 PM

A couple of major holes in the ground in Vancouver, BC, Canada.

From the Province: Bank pulls funding on luxury condo project

A splashy jewel of a downtown condo development ... has been put on hold after a bank pulled funding, the latest in a growing list of failed residential projects.
...
At the site, a crane sat idle and there was no activity in the partially completed seven-storey-deep hole at the $180-million project that was scheduled to be finished by spring 2010.

Ritz Carlton Vancouver Condo Project Postponed

by Calculated Risk on 11/18/2008 05:07:00 PM

From Bloomberg: Westin, Promenade Commercial Mortgages Near Default (hat tip Ted)

The $209 million Westin Portfolio loan and the $125 million loan for Promenade Shops at Dos Lagos ... of loans bundled into bonds are about to default on their debt, according to Credit Suisse Group AG.
...
The Westin loan is backed by two hotels located in Tucson, Arizona, and Hilton Head, South Carolina. ... The Promenade Shops are located in Corona, California, one of the regions hardest hit by the worst housing crisis since the Great Depression.

Not really a surprise - possible defaults on mortgages for a shopping center near ground zero of the housing bust, and for hotels with the rapidly declining occupancy rates.

UPDATE: Deutsche Bank analysts Richard Parkus and Jing An commented on these two deals today in a research note (hat tip Marc):

"The delinquencies of the two large loans have caught many by surprise. ... Delinquencies in loans of such limited seasoning are extremely unusual, particularly for very large loans."

The analysts note that these were "pro forma" loans, and were based on significantly higher operating income in the future. Pro forma loans were the "stated income" loans for commercial properties!

"Pro forma underwriting was a common phenomenon from late 2006 through 2007 and these two loans validate our concerns regarding the practice."

With falling office rents, rising vacancies rates for offices and malls - falling occupancy rates for hotels - these pro forma deals will collapse once the borrowers run through the interest rate reserves.