by Calculated Risk on 4/22/2009 12:37:00 PM

From the IMF report: Global Prospects and Policies

The global economy is in a severe recession inflicted by a massive financial crisis and an acute loss of confidence. Wide-ranging and often unorthodox policy responses have made some progress in stabilizing financial markets but have not yet restored confidence nor arrested negative feedback between weakening activity and intense financial strains. While the rate of contraction is expected to moderate from the second quarter onward, global activity is projected to decline by 1.3 percent in 2009 as a whole before rising modestly during the course of 2010.

These graphs from the IMF report show the synchronized global cliff diving.

Click on graph for larger image in new window.

On page 11 is a note about Global Business Cycles:

In 2009, almost all the advanced economies are expected to be in recession. The degree of synchronicity of the current recession is the highest to date over the past 50 years. Although it
is clearly driven by declines in activity in the advanced economies, recessions in
a number of emerging and developing economies are contributing to its depth and synchronicity.

To summarize, the 2009 forecasts of economic activity, if realized, would qualify this year as the most severe global recession during the postwar period. Most indicators are expected to register sharper declines than in previous episodes of global recession. In addition to its severity, this global recession also qualifies as the most synchronized, as virtually all the advanced economies and many emerging and developing economies are in recession.
emphasis added

On page 10 are the IMF economic forecasts. For the U.S., the IMF is forecasting -2.8% real change for GDP in 2009, and 0.0% (no change) in 2010.

That is basically the same as the "more adverse" stress test scenario:


Click on table for larger image in new window.

by Calculated Risk on 4/22/2009 10:24:00 AM

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

[T]ravel during February 2009 on all roads and streets in the nation changed by -0.9 percent (-1.9 billion vehicle miles) resulting in estimated travel for the month at 215.8 billion vehicle-miles.
...
NOTE: The Average Daily Travel changed by +2.7% for February 2009 as compared to February 2008

Update: added the leap year adjustment.

Click on graph for larger image in new window.

The first 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 3.6% Year-over-year (YoY); the decline in miles driven is worse than during the early '70s and 1979-1980 oil crisis.

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

This comparison has been improving. As the DOT noted, miles driven in February 2009 were 0.9% less than in February 2008.

Year-over-year miles driven started to decline in December 2007, and really fell off a cliff in March 2008. So the March 2009 report, to be released next month, will be very interesting.

by Calculated Risk on 4/22/2009 09:08:00 AM

From Reuters: Architecture billings index jumps in March: AIA

Update: From AIA: Architecture Billings Index Shows Early Signs of Improving Business Conditions

After a series of historic lows, the Architecture Billings Index (ABI) was up more than eight points in March. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the March ABI rating was 43.7, up from the 35.3 mark in February. This was the first time since September 2008 that the index was above 40, but the score still indicates an overall decline in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry score was 56.6.

“This news should be viewed with cautious optimism,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “The fact that inquiries for new projects increased is encouraging, but it will likely be a few months before we see an improvement in overall billings. Architects continue to report a diversity of business conditions, but the majority is still seeing weak activity levels.”

Click on graph for larger image in new window.

This graph shows the Architecture Billings Index since 1996. The index is still below 50 indicating falling demand.

Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on commercial real estate (CRE). So there will probably be further dramatic declines in CRE investment later this year.

by Calculated Risk on 4/22/2009 08:41:00 AM

Form the Financial Times: Bank tests we should get stressed about (ht MrM)

[T]he tests suggested a concrete way to differentiate between the solid institutions that can raise private capital, and those that will (and must) feel a heavy government hand.
...
First, transparency is key. Whether the government likes it or not, hundreds of analysts around the world will reverse engineer the stress tests. The government would be well advised to assist the process through clarity ...

Second, the results of the stress tests must be part of a comprehensive, forward-looking package to resolve problems at banks. Out-performing banks should be provided with exit mechanisms from the exceptional government support that they have been receiving and, presumably, no longer need. At the other end, there must be clarity as to how capital-deficient banks that no longer have access to private capital will be handled.

There is more, but I think these are the two key points: Transparency is key. And the results should be announced as part of a comprehensive plan.

by Calculated Risk on 4/22/2009 01:23:00 AM

By popular request, an open thread and a few sources for futures and the foreign markets.

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets.

And a graph of the Asian markets.

And a little music ...

Best to all.

by Calculated Risk on 4/21/2009 10:09:00 PM

From David Leonhardt at the NY Times: For Housing Crisis, the End Probably Isn’t Near

Note: See article for graphic on house prices to median income by city.

... I decided to go to an auction at a hotel ballroom in Washington — and to study the results of several others elsewhere — with an eye to figuring out whether prices may now be close to bottoming out.
...
The winning bid on the first home auctioned off, a two-bedroom townhouse in Virginia Beach, was $115,000. Just last July, it sold for $182,000, according to property records. A four-bedroom brick house with a two-car garage in Upper Marlboro, Md., went for $375,000. Last year, it sold for $563,000.

Leonhardt provides other auction examples, and concludes prices are still falling sharply:

[T]he great real estate crash is not over, either. So if you are part of the 30 percent of American households who rent and you’re trying to decide when to buy, relax.

The market is still coming your way.

As I've noted before, most housing busts have two bottoms; the first bottom will be for residential investment (RI), and the second will be for existing home prices. The second bottom will come later, possibly much later. We haven't even seen the bottom for RI yet!

Given the huge excess supply, especially of distressed properties, I think Leonhardt is correct that prices will continue to fall.

by Calculated Risk on 4/21/2009 06:45:00 PM

Conference call notes (ht Brian):

Economic deterioration continued at a rapid pace during the first quarter driving increasing delinquency and charge off rates across most of our lending businesses. U.S. card charge off rate increased to 8.4% for the first quarter, above the 8.1% charge off rate expectation we articulated a quarter ago. Expected seasonal increases in bankruptcies and declining loan balances resulted in higher charge off rates compared to the fourth quarter of 2008. The increase in charge off rates beyond our expectations resulted from several factors related to the pace of economic deterioration in the quarter. Bankruptcies were higher than expected, increasing charge-offs directly without impacting delinquency rates. Recoveries on already charged off debt were lower than expected. We also observed an acceleration of later stage delinquency balances slowing to charge off in the quarter. For context recall that when we articulated our expectations last January the unemployment rate was 7.2% and we assumed it would increase to about 8.7% by the ends of 2009. The unemployment rate has already deteriorated to 8.5% and is expected to move beyond 8.7% well before year end. Even though our U.S. card charge off rate was higher than the expectation we had last quarter delinquencies and charge-offs were a bit better than we would have expected given the actual economic worsening we've seen in the quarter. ...

Credit Loss outlook

We expect further increases in U.S. card charge off rate through 2009 as the economy continues to weaken. It is likely that will our U.S. card charge off rate will increase at a faster pace than the broader economy as a result of the denominator effect and our implementation of OCC minimum payment requirements ... We expect monthly U.S. card charge off rates to cross 10% in the next couple of months.

Economic Outlook

I'll update our economic outlook. Unemployment and home prices have been and continue to be the economic variables with the greatest impact on our credit results. We now expect unemployment rate to increase to around 9.6% by the ends of 2009. Our prior assumption for home prices was for the Case Shiller 20 city index to fall by around 37% peak to trough. We now expect a modestly worse peak to trough decline of around 39%. ...

The expected 'greater than 10% charge-off rate' is probably worse than the expected credit card loss rates for the "more adverse" scenario. I'll be curious if the Federal Reserve white paper, to be released on Friday, will mention the expected loss rates by category.

by Calculated Risk on 4/21/2009 05:16:00 PM

Here is a letter from the FHFA to Chairman Dodd that was released today (ht James, Tim, Brian)

Update: here is the news release from FHFA: FHFA Expands Reporting on Homeowner Assistance

The tables show that the number of prime 60 days+ delinquent rose to 743,686 in January, from 497,131 in December. This is an increase from 1.93% in December to 2.89% in January.

The number of non-prime 60 day+ delinquent loans increased too; from 428,705 in December to 485,365 in January. But the foreclosure problem is now mostly a prime problem!

Or as Tanta used to say: "We're all subprime now!"

by Calculated Risk on 4/21/2009 04:13:00 PM

Pier loans: Bridge loans that couldn't be sold.

From the WSJ: Bankers Rebuff U.S. on Chrysler Debt

Chrysler owes ... lenders, which include banks such as Citigroup Inc. and J.P. Morgan Chase & Co., about $6.9 billion. But President Barack Obama and his auto team had demanded that the banks cut that to $1 billion, while gaining no equity stake in a restructured Chrysler.

In their five-page counteroffer, the lenders said they are prepared to cut Chrysler's first-lien debt by $2.4 billion, or down to about $4.5 billion, in exchange for a minority equity stake, likely to be 35% to 40% ...

The lenders have told Treasury ... they could recover at least 65% of their loans to the company if it is liquidated in bankruptcy.

Chrysler is probably worth more dead than alive - at least to these debt holders. That complicates the negotiations.

Nine days to go ...

by Calculated Risk on 4/21/2009 02:31:00 PM

Here are the links to the reports released today (IMF and SIGTARP):

SIGTARP:

Website: Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP)

April 21, 2009 - Quarterly Report to Congress

IMF:

IMF: Global Financial Stability Report website

by Calculated Risk on 4/21/2009 01:55:00 PM

Voit released quarterly reports today for CRE in Las Vegas, San Diego and Orange County.

The reports show the vacancy rates are up, and lease rates (falling rents), net absorption, transactions and construction are all down.

It appears new construction has all but stopped. Here are a couple of graphs for Orange County and San Diego. We are seeing a similar pattern nationwide, although new construction in these areas probably slowed earlier than most of the country.


Click on graph for larger image in new window.

This graph shows the annual Orange County office vacancy rate and new construction since 1998. (See Voit report for more.

In 2007 the rapid increase in the vacancy rate was due to a huge increase in new space combined with negative absorption as a number of Orange County financial companies (like New Century) went under. New construction has almost stopped, but the net absorption rate is still negative, so the vacancy rate is still rising.

Because of the concentration of subprime lenders in Orange County, the office space market was hit earlier than other areas of the country.

From the Voit report:

Total space under construction checked in at 173,209 square feet at the end of the first quarter, which is almost 80% lower than the amount that was under construction this same time last year. ... The office vacancy rate (for direct and sublease space) finished the year at 15.58%, constituting an increase over last year’s rate of 13.28%.

Although the chart only goes back to 1998, the record year for new development in Orange County was 1988, when 5.7 million square feet of new space was added. The vacancy rate peaked at approximately 24% in 1988 (the S&L crisis related office boom).

The second graph is for San Diego. The dynamics are similar, but construction halted later than in Orange County. From Voit:

The office vacancy rate (for direct and sublease space) finished the quarter at 16.03%, constituting a 25.23% increase over last year’s first quarter rate of 12.80%. This increase is a result of the new construction, 2.5 million square feet during 2008, coupled with a slowing economy ...

Currently there is 1.3 million square feet of Office construction underway, and total construction is lower than it was a year ago when 3.2 million square feet was under construction. This is a decrease of 59% when compared to last year ...

Although Voit didn't provide a similar graph for Las Vegas, the situation is clearly worse:

The valley-wide average vacancy rate reached 19.6 percent, which represented a 2.0-point increase from the preceding quarter (Q4 2008). Compared to the prior year (Q1 2008), vacancies were up 4.9 points from 14.7 percent.
...
The northwest witnessed the completion of Montecito Point near the intersection of key freeways, the Interstate 215 and US-95. The 186,300-square-foot building remains substantially vacant.
...
As of the close of the quarter, approximately 1.9 million square feet was in some form of construction. The southwest reported nearly 1.1 million square feet underway. As market conditions continue to shift, the timing of selected projects remains uncertain. Nearly 30 percent of product identified as under construction has delayed timing, halted material development activity or in the foreclosure process ...
emphasis added

Although each market is different, clearly new office construction has all but halted.

by Calculated Risk on 4/21/2009 12:22:00 PM

From Bloomberg: Pandit Says He’ll Repay ‘Every Dollar’ of TARP Funds

Citigroup Inc. Chief Executive Officer Vikram Pandit, speaking at the company’s annual shareholder meeting, said he will repay “every dollar with interest” of funds received [from TARP].

More from the WSJ:

Citigroup Chief Executive Vikram Pandit struck a positive, even hopeful tone, at the embattled banking giant's annual meeting, insisting that it is well prepared for success in an economic recovery.

In his review of Citi's 2008, Pandit said, "The vital signs of Citi are improving." He predicted Citi will have "strong operating leverage" going forward once the economy recovers.

Remember Pandit took over in December 2007, not long after Chuck - “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.” - Prince resigned.

by Calculated Risk on 4/21/2009 10:25:00 AM

From the WaPo: Geithner Faces Oversight Grilling

Treasury Secretary Tim Geithner is testifying before a congressional oversight committee headed by Elizabeth Warren, the overseer of the bailout, underway right now.

Warren is setting the tone of the hearing, telling Geithner that Americans are "angry" at how the bailout has been administered so far, by both Geithner and his predecessor, Hank Paulson.

"People want to see action in terms that make sense to them," Warren said, is Geithner nodded solemnly.

Here is the text of the letter describing the bailout.

Here is the CNBC feed.

And a live feed from C-SPAN.

by Calculated Risk on 4/21/2009 09:12:00 AM

From Bloomberg: IMF Says Global Losses From Credit Crisis May Hit $4.1

Worldwide losses tied to rotten loans and securitized assets may reach $4.1 trillion by the end of 2010 as the recession and credit crisis exact a higher toll on financial institutions, the International Monetary Fund said.

Banks will shoulder about 61 percent of the writedowns, with insurers, pension funds and other nonbanks assuming the rest ... The fund projected losses of $2.7 trillion at U.S. financial institutions, an increase from its estimates of $2.2 trillion in
January and $1.4 trillion in October.

The $4.1 trillion estimate is the first by the IMF to include loans and securities originating in Europe and Japan. ...

The report said U.S. bank losses at the end last year totaled $510 billion. Additional writedowns of $550 billion are expected through 2010. The projections exclude government-sponsored enterprises.

Here is the Reuters report.

And from the WSJ: IMF: Banks Need $875 Billion in Equity

by Calculated Risk on 4/21/2009 12:02:00 AM

From the WSJ: TARP Watchdog Urges Better Oversight

A report by the TARP watchdog said the Treasury should take steps to better manage its financial-rescue effort so that taxpayer dollars are safeguarded and programs are more fraud-resistant, accountable and transparent.

And on the potential for gaming the PPIP:

"The significant Government-financed leverage presents a great incentive for collusion between the buyer and seller of the asset, or the buyer and other buyers, whereby, once again, the taxpayer takes a significant loss while others profit," [the report said]

This is the second quarterly report to Congress on the $700 billion TARP.

From the LA Times: Inspector general cites potential flaws in bank bailout, urges Treasury to adopt safeguards. An excerpt on the PPIP:

"The sheer size of the program ... is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives," the report states.

This is harsh criticism of the PPIP (well deserved in my view). And a pretty critical report of the overall handling of the TARP.

by Calculated Risk on 4/20/2009 07:35:00 PM

Here are some excerpts from the Texas Instruments conference call (ht Brian)

You'll recall at the midquarter update we raised the middle of our guidance range and referenced that 3G communications infrastructure in China was the most notable area of better than expected strength. In the last few weeks of the quarter, in addition to base stations, we also saw better than expected demand from notebook computers, some other sectors of the handset market, as well as from LCD-based HDTVs.

Regionally, most of the strength is coming from Asia, while the other regions remain subdued. Therefore, we wouldn't characterize the stronger demand as broad based, as it was concentrated in a few high volume end markets and the Asian region. Nonetheless, it is encouraging to see our revenues stabilizing, albeit at what remains a low level.

We also caution that the stabilization is likely being driven by customers that are slowing their inventory reduction and not by broad-based increases in end consumption or by customers rebuilding inventory. Let me explain. Over the last few quarters, we saw dramatic drop in demand for our chips because customers slowed their production and began to reduce the chip inventory they had in stock. Now that they have realigned their own production with the lower level of consumer end demand and reduced their existing chip inventory, order trends for our chips have started to improve. This leads us to believe that the worst of the inventory drain is now finished and our shipments will more closely reflect our customers' production levels. However, the most important determinant of our business levels in the second half of this year will be the real end consumption trends. From our perspective, there remains significant uncertainty about the direction of end consumption. As a result, we are careful not to misread the completion of inventory reduction as a return to higher end demand. Our approach is that we will keep our operations highly flexible to respond to whatever direction demand will track, while remaining highly diligent to inventory and costs.
emphasis added

More on inventory correction:

The reduction in inventory that we achieved resulted in inventory days declining to 77 at the end of the quarter, compared with 94 days at the end of the year-ago quarter, and 89 days at the end of the fourth quarter. TI orders in the quarter were 2.19 billion, up 18% sequentially. After a five-month slide, product orders bottomed in the month of December and increased each month through the first quarter. TI book to bill increased to 1.05 in the quarter from 0.75 in the prior quarter.

But they have drastically reduced capital expenditures:

Going forward, we anticipate for this year that we would spend upwards of $300 million on capital for the year. ['08 was $763 million, '06 was $1.27B]

And from the Q&A:

Analyst: Could you go into a little bit more detail on what you guys are looking for that would enable you to think that we are at the beginning of a new semiconductor cycle?

TXN: What we saw was just one region, primarily Asia, and just a couple of large verticals, primarily the -- infrastructure, notebooks, and some handsets and LCD TVs as picking up a little bit late in the quarter. We did not see it importantly in other regions around the world and we did not see it in the industrial or consumer sectors. So until we see demand pick up in other regions, as well as in other sectors, we don't believe that we're looking at something that suggests that there's an overall increase in demand to be anticipated. Right now, it feels more to us like our demand [from] our customers are lining up their orders to end demand – at an overall level lower than it has been for quite sometime.

by Calculated Risk on 4/20/2009 05:11:00 PM

Excerpt (any errors by CR):

Q: What about capital adequacy. Are you expecting to raise new capital?

Lewis: We are not expecting to need more capital. The issue of course - which was brought up today which is hurting all bank stocks - will some be required convert some of their preferred to common. We don't think we have an issue there. But that is now in the hands of the regulators, and we have not heard back from them at this point in time.

Q: What should we look for as far as the most important things to come out of the stress tests?

Lewis: I think it will be what requirements are there on what banks in terms of conversion of TARP preferred into TARP equity.

Q: You said you want to pay back the TARP money in 2009. Is that still on the table? Are you expecting to pay back that TARP that soon?

Lewis: Well, we would like to, and we would prefer to. But again that is now in the hands of the regulators and we will be in consultation with them as to what the best avenue will be in that regard.

What does converting preferred shares to common accomplish? Krugman comments on this today: Preferred shares to common equity: an analogy

by Calculated Risk on 4/20/2009 03:54:00 PM

I'm looking forward to the housing news later this week!

And on the false Stress Test rumor this morning, from Bloomberg: Treasury Says ‘No Basis’ to Report on Bank Testing

A U.S. Treasury spokesman said there’s no basis to a blog posting that buffeted financial stocks by saying that most of the nation’s largest banks are insolvent.

Why are they even responding?

DOW down 3.6%

S&P 500 down 4.3%

NASDAQ down 3.9%

Click on graph for larger image in new window.

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

This is the 2nd worst S&P 500 / DOW bear market in the U.S. in 100 years.

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

The second graph compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500.

See Doug's: "The Mega-Bear Quartet and L-Shaped Recoveries".

by Calculated Risk on 4/20/2009 01:31:00 PM

Zach Fox at the North County Times brings us another half off sale ... this time in a little higher price range. This is a 5,500 sq foot home in Escondido. Zach says the bank ate $815,000.

Photo by Zach Fox

Click on photo for larger image in new window.

November 2006: $1,650,000

February 2009: $805,000*

*Zach Fox notes this was the price the bank bid at the foreclosure auction. For some time it wasn't worth going to foreclosure auctions because the banks would bid what they were owed - and that would be more than the property was worth. I'll see if I can more details on this house.

by Calculated Risk on 4/20/2009 11:25:00 AM

From the LA Times: Southern California office market is hammered by recession

Vacancy in Los Angeles County reached 14.3% in the first quarter, up from 11.2% a year earlier, according to a report released last week by Cushman & Wakefield. In Orange County, where demand has been dwindling for more than a year, vacancy ticked up to nearly 18% from 15%.

Among the hardest-hit markets are the Inland Empire, Irvine and north Los Angeles County, all of which have been wracked by the losses of tenants in the troubled industries of mortgage and finance. Vacancies in all three areas have surpassed 20%, a sign of a very weak market. In Ontario and the area around Los Angeles International Airport, vacancy tops 30%.

And the following is ... amusing:

In West Los Angeles, owners are steeply discounting the monthly cost of an office -- cutting rates that, ironically, grew so high during the boom years that many companies were forced to move out and find cheaper digs.

I saw this in my community too. Leases expired. Landlords raised the rents sharply. The long term tenants moved out. Real estate related businesses moved in. And now the buildings are vacant!