by Calculated Risk on 4/29/2009 05:37:00 PM

From the WaPo: Sources: Chrysler Bankruptcy Plan Would Oust CEO, Install Fiat Management

Chrysler chief executive Robert Nardelli would be replaced by the management of Italian automaker Fiat under a bankruptcy plan that the United States is preparing for the storied automaker...

If the bankruptcy proceeds as expected ... The ownership of the new company would be divided between the union's retiree health fund, which would get a 55 percent stake, Fiat, which would get at least a 35 percent stake, and the United States, which would take an 8 percent stake. The Canadian government would receive two percent.

Chrysler's creditors would get $2 billion in cash and no equity stake. The automaker's current owner Cerberus Capital Management would be wiped out.

The deadline is tomorrow.

by Calculated Risk on 4/29/2009 03:55:00 PM

From Bloomberg: Lewis Ranieri Says Housing Is ‘Shouting Distance’ From Bottom

“I’m actually very enthusiastic about housing, and I haven’t said that in five years,’’ Ranieri said, speaking on a panel at the Milken Institute Global Conference in Beverly Hills, California. “We’re within shouting distance of a bottom.”

The article says Ranieri was talking about prices, but that isn't clear from the quote. He might be talking about residential investment. Prices will fall further ...

And a look at the markets ...

Click on graph for larger image in new window.

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


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 4/29/2009 02:15:00 PM

From the FOMC:

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

by Calculated Risk on 4/29/2009 11:41:00 AM

Although Q1 GDP was very negative due to the sharp investment slump (this was expected, see: Q1 GDP will be Ugly), the decline in Q1 was weighted towards lagging sectors.

Click on graph for larger image in new window.

This table shows the contribution to GDP for several sectors in Q1 2009 compared to Q4 2008.

The leading sectors are on the left, the lagging sectors towards the right.

There has been a shift from leading sectors to lagging sectors, although the negative contribution from residential investment was larger in Q1 than in Q4 2008.

However it appears that the slump in residential investment (mostly new home construction and home improvement) is slowing, and I expect the contribution to Q2 2009 to be close to zero - after declining for 13 consecutive quarters.

This doesn't mean the downturn is over, but this does suggest that the worst of the GDP declines is probably over.

For more, see Business Cycle: Temporal Order. Here is a repeat of the table showing a simplified typical temporal order for emerging from a recession:

When Recovery Typically Starts

During Recession	Lags End of Recession	Significantly Lags End of Recession
Residential Investment	Investment, Equipment & Software	Investment, non-residential Structures
PCE	Unemployment(1)

(1) In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.

Note: Any recovery will probably be sluggish, because household balance sheets still need repair (more savings), and any rebound in residential investment will probably be small because of the huge overhang of existing inventory. As I noted in Temporal Order, at least we know what to watch: Residential Investment (RI) and PCE. The increasingly severe slump in CRE / non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.

by Calculated Risk on 4/29/2009 09:13:00 AM

The huge investment slump was the key story in Q1.

Click on graph for larger image in new window.

Residential investment (RI) has been declining for 13 consecutive quarters, and Q1 2009 was the worst quarter (in percentage terms) of the entire bust. Residential investment declined at a 38% annual rate in Q1.

This puts RI as a percent of GDP at 2.7%, by far the lowest level since WWII.

The second graph shows non-residential investment as a percent of GDP. All areas of investment are now cliff diving.

Business investment in equipment and software was off 33.8% (annualized), and investment in non-residential structures was off 44.2% (annualized).

The third graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures. The graph shows the rolling 4 quarters for each investment category.

This is important to follow because residential tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

Residential investment (red) has been a huge drag on the economy for the last couple of years. The good news is the drag on GDP will probably be getting smaller going forward.

Even if there is no rebound in residential investment later this year, the drag will be less because there isn't much residential investment left! The bad news is any rebound in residential investment will probably be small because of the huge overhang of existing inventory.

As expected, nonresidential investment - both structures (blue), and equipment and software (green) - fell off a cliff. In previous downturns the economy recovered long before nonresidential investment in structures recovered - and that will probably be true again this time.

As always, residential investment is the most important investment area to follow - it is the best predictor of future economic activity.

by Calculated Risk on 4/29/2009 08:32:00 AM

From the BEA: Gross Domestic Product: First Quarter 2009 (Advance)

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 6.1 percent in the first quarter of 2009 ...

Real personal consumption expenditures increased 2.2 percent in the first quarter, in contrast to a decrease of 4.3 percent in the fourth. ...

Real nonresidential fixed investment decreased 37.9 percent in the first quarter ...

Nonresidential structures decreased 44.2 percent ...

Equipment and software decreased 33.8 percent ...

Real residential fixed investment decreased 38.0 percent ...

So PCE increased (as expected), but investment slumped sharply in all categories.

From Rex Nutting at MarketWatch: GDP falls 6.1% on record drop in investment

The two-quarter contraction is the worst in more than 60 years. The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizzying pace ...

For the stress tests, the baseline scenario for Q1 was minus 5.0%, and the more adverse scenario was minus 6.9%, so, before revisions, Q1 is between the two scenarios. More to come ...

by Calculated Risk on 4/28/2009 11:49:00 PM

By popular request ... the futures are up slightly ahead of the GDP report. Asian markets are mostly up (Nikkei is off over 2%).

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets.

Best to all.

by Calculated Risk on 4/28/2009 09:23:00 PM

From the Financial Times: Commercial mortgages at risk

“Commercial real estate is in a world of hurt and will be for at least the next two years,” said Ross Smotrich, analyst at Barclays Capital. “This is a capital intensive business in which lending capacity has diminished because of the absence of securitisation, while the fundamentals are driven by the overall economy so both occupancy and rents are declining.”

... At the end of the first quarter, defaults and payments more than 60 days late were at 1.53 per cent of outstanding mortgages. Fitch said they could reach 4 per cent by the end of 2010.

Rising vacancy rates and falling rents ... not the best fundamentals. The story is the same for retail, multi-family, industrial, and hotels. CRE: A world of hurt.

by Calculated Risk on 4/28/2009 06:45:00 PM

This REO was bought for $163,000 in January, repaired, and then listed for $265,000. It went pending the first week.

Jim says this house was in similar condition as this REO disaster.

by Calculated Risk on 4/28/2009 05:03:00 PM

On more Case-Shiller graph ...

The following graph is based on the Case-Shiller Tiered Price Indices for San Francisco. Case-Shiller has tiered pricing data for all 20 cities in the Composite 20 index.

Click on graph for larger image in new window.

This shows that prices increased faster for lower priced homes than higher priced homes. And prices have also fallen faster too.

It now appears mid-to-high priced homes are overpriced compared to lower priced homes - although prices will probably continue to fall for all three tiers. Because of foreclosure activity, I expect the lower priced areas to bottom (especially in real terms) before the higher priced areas.

For those interested, Case-Shiller also has condo price indices for five cities: Los Angeles, San Francisco, Chicago, Boston and New York.

by Calculated Risk on 4/28/2009 03:46:00 PM

Here are a few interesting comment from the Liberty Property Trust conference call (ht Brian). Note LRY is a REIT specializing in industrial and office properties.

Let me turn to our operating performance and real estate fundamentals. Normally the first quarter is our slowest quarter for the year. But in addition, we clearly felt the full impact of the economic downturn in our markets. We leased 2.8 million square feet in the quarter, down 50% from our leasing productivity in the fourth quarter. This decline is totally consistent with what we are seeing in the markets, a 40% decline in deal activity from 2008 levels. Occupancy declined to 90.1% driven by a decline in our renewal percentage to 54.1%. This renewal decline was driven by our industrial portfolio, since our office and flex renewal rates were 72 and 63% respectively. What happened were three large industrial expirations that simply shut down their operations. A pattern that I think we are going the see more of throughout the rest of 2009. Consistent with the competitive nature of the markets, rents were flat.
...
We are seeing the manifestation of the [soft economy] as more tenants downsize at the end of their lease. On last quarters call we discussed a recent trend where tenants were asking for rent relief and for the most part we were saying no, but more recently we were seeing an additional trend where good tenants with strong credit come to us before the end of their lease looking for rate reduction in current rent in exchange for additional lease term. In these instances we conduct a thorough economic analysis considering the credit of the tenant, the length of the proposed term, the health of the market and the extent to which we do business or could do business with that customer in multiple markets to. To date we are only completed a few of these “blend and extend” transactions, but we believe in a tenant driven market tenants will continue to ask their landlord to participate. While our portfolio has higher occupancy than the market in most of our cities, aggressive competitive behavior is rapidly affecting rental rates and concessions. On new leases and to a lesser degree on renewal leases, market rents are generally lower, varying by product type availability of competitive space, size, credit and term. The range is wide from slightly up to down as much as 20%. Concessions on new leases primarily in the form of free rent have increased during the first quarter and also vary by market and by lease term. Some leases have none. Some leases a few months and some as much as one month per year to as much as six months in the lease…A new phenomenon that is beginning to have a positive impact on our ability to get deals done is the fact that tenants and brokers that represent them are now underwriting landlords [for credit quality].

New tenants are making sure their landlords will stay in business! And from the Q&A on cap rates:

Analyst: With $100 million of asset sales that you guys are looking to do, are you looking for a range of cap rates or what kind of timing you are looking at there?

LRY: We’re staying with our original guidance on the range which I believe was eight to 11% ...

Analyst: Maybe I missed it but for the 35 million that you sold in the quarter did you guys provide a cap rate on that.

LRY: It was about mid nines.

These are probably industrial buildings with higher cap rates than offices or retail, but cap rates have clearly risen significantly. Rents are falling, cap rates are rising - and that means prices are cliff diving.

by Calculated Risk on 4/28/2009 01:21:00 PM

Press Release from the U.S. Treasury: Obama Administration Announces New Details on Making Home Affordable Program

Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by Treasury, allowing servicers to target principal extinguishment to the borrowers where extinguishment is most appropriate.

Here is the program update.

And a couple of examples of how the 2nd lien program would work.

Here are the basics (the interest rate reduction is for 5 years):

For amortizing loans (loans with monthly payments of interest and principal), we will share the cost of reducing the interest rate on the second mortgage to 1 percent. Participating servicers will be required to follow these steps to modify amortizing second liens:

Reduce the interest rate to 1 percent;

Extend the term of the modified second mortgage to match the term of the modified first mortgage, by amortizing the unpaid principal balance of the second lien over a term that matches the term of the modified first mortgage;

Forbear principal in the same proportion as any principal forbearance on the first lien, with the option of extinguishing principal under the Extinguishment Schedule;

After five years, the interest rate on the second lien will step up to the then current interest rate on the modified first mortgage, subject to the Interest Rate Cap on the first lien, set equal to the Freddie Mac Survey Rate;

The second mortgage will re-amortize over the remaining term at the higher interest rate(s); and

Investors will receive an incentive payment from Treasury equal to half of the difference between (i) the interest rate on the first lien as modified and (ii) 1 percent, subject to a floor.

The interest only second lien structure is similar with the interest rate being reduced to 2%.

Although this is a serious reduction in the interest rate, this will probably attractive to 2nd lien investors - since the loss severity on second liens is so high. What happens in five years when the rates change for all these borrowers with negative equity?

by Calculated Risk on 4/28/2009 12:23:00 PM

From the NY Times: Deal Is Set on Chrysler Debt That May Avert Bankruptcy

The Treasury Department has worked out a preliminary agreement with Chrysler’s largest secured creditors ...

Chrysler has about $6.9 billion in secured debt owned by big banks such as Citigroup and JPMorgan Chase and a group of hedge funds. Under the proposal, all of the debt would be canceled in exchange for $2 billion in cash...

The initial Treasury offer was $1.0 billion, and the banks countered at $4.5 billion and 40% equity in the new Chrysler. These is no mention of equity in the story.

by Calculated Risk on 4/28/2009 11:22:00 AM

The following graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

In Phoenix, house prices have declined more than 50% from the peak. At the other end of the spectrum, prices in Charlotte and Dallas are off about 11% to 12% from the peak. Prices have declined by double digits everywhere.

Prices fell by 1% or more in most Case-Shiller cities in February, with Phoenix off 5.0% for the month alone.

And here is the price-to-rent ratio for a few cities ...

The second graph shows the price-to-rent ratio for Miami, Los Angeles and New York. This is similar to the national price-to-rent ratio, but uses local prices and local Owners' equivalent rent.

This ratio is getting close to normal for LA and Miami (Miami is back to the Jan 2000 ratio), but still has further to fall in NY.

Note: The Owners' Equivalent Rent (OER) is still increasing according to the BLS, however there are many reports of falling rents that isn't showing up yet in the OER.

by Calculated Risk on 4/28/2009 10:14:00 AM

For more on house prices, please see: Case-Shiller: Prices Fall Sharply in February

Click on graph for larger image in new window.

The first graph compares the Case-Shiller Composite 10 index with the Stress Test scenarios from the Treasury (stress test data is estimated from quarterly forecasts).

The Stress Test scenarios use the Composite 10 index and start in December. Here are the numbers:

Case-Shiller Composite 10 Index, February: 154.70

Stress Test Baseline Scenario, February: 157.26

Stress Test More Adverse Scenario, February: 154.01

It has only been two months, but prices are tracking the More Adverse scenario so far.

But we have to remember the headline Case-Shiller is not seasonally adjusted, and there is a strong seasonal pattern. Update: there is a seasonally adjusted data set here.

This graph shows the month to month change (annualized) for the Case-Shiller Composite 10 index.

Prices usually decline at the fastest rate in the winter months (or increase the least with rising prices), and prices decline the slowest during the summer. Just something to remember when the month-to-month price declines slow this summer.

This is why we use the year-over-year (YoY) price change too (in previous post). The YoY change for the Composite 10 is -18.8%, the worst YoY change was last month (January 2009 at -19.4%). About the same.

I'll have some Case-Shiller city data soon.

by Calculated Risk on 4/28/2009 09:05:00 AM

S&P/Case-Shiller released their monthly Home Price Indices for February this morning. This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). Note: This is not the quarterly national house price index.

Click on graph for larger image in new window.

The first graph shows the nominal Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 31.6% from the peak, and off 2.1% in February.

The Composite 20 index is off 30.7% from the peak, and off 2.2% in February.

Prices are still falling and will probably decline for some time.

The second graph shows the Year over year change in both indices.

The Composite 10 is off 18.8% over the last year.

The Composite 20 is off 18.6% over the last year.

This is near the worst year-over-year price declines for the Composite indices since the housing bubble burst started.

I'll have more on house prices including a comparison to the stress test scenarios soon.

by Calculated Risk on 4/28/2009 12:48:00 AM

From the WSJ: Fed Pushes Citi, BofA to Increase Capital

Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital ...

Executives at both banks are objecting to the preliminary findings ...

Industry analysts and investors predict that some regional banks, especially those with big portfolios of commercial real-estate loans, likely fared poorly on the stress tests. Analysts consider Regions Financial Corp., Fifth Third Bancorp and Wells Fargo & Co. to be among the leading contenders for more capital....

The article also notes that the results of the stress test could be released the week of May 4th - and not on May 4th as originally announced.

No one will believe the test results if Citi isn't required to raise more capital.

by Calculated Risk on 4/27/2009 08:49:00 PM

Professor Shiller spoke at Seattle Pacific University today. After the Q&A, reader Erik asked Shiller:

Q: Why does the FHFA (OFHEO) index show house price gains for the last two months, whereas the Case-Shiller is showing prices are still falling.

A (Erik's notes): He thought about it for a bit, and said "I haven't studied it yet", I think it is because the "OFHEO index doesn't capture foreclosures as much our index." They tend to use conventional mortgages more and conventional mortgages seem to hold out longer and as a result "there may be an upward bias to their numbers." He then paused and said, the OFHEO numbers are a bit fishy (he looked perplexed) to me because they seem to have broken the smooth trend (he gestured with his hand the trend and finished with an upward movement) and I can't quite figure out where they came from, but I suspect it is from them capturing too few foreclosures or us capturing too many (laughs) even OFHEO has said they don't know why or can't explain their own numbers from the last two months.

I'll revisit this question soon, but I prefer the Case-Shiller index.

Tim at the Seattle Bubble Blog has more: Robert Shiller at SPU—Psychology and the Housing Market

One amusing part of the afternoon session was a story Dr. Shiller related about a localized Los Angeles housing bubble in 1885. In describing the mentality in 1885 Los Angeles, he said that people thought “Los Angeles is special!” He also quoted from an article in the LA Times which was published during the aftermath of the collapse in 1886:

We Californians have learned something. And that is that home prices can’t just go up forever—they have to be supported by something. Never again will Californians make this mistake.

...
For anyone interested in hearing the entire afternoon lecture, you can listen to it right here:

Also, the Case-Shiller house price index for February will be released tomorrow morning (Tuesday).

by Calculated Risk on 4/27/2009 06:20:00 PM

This morning GM offered to exchange equity in the restructured company for the outstanding $27 billion in debt. The bondholders responded negatively ...

Statement from ad hoc committee of GM bondholders via WSJ:

... The current offer is neither reasonable nor adequate. Both the union and the bondholders hold unsecured claims against GM. However, the union's VEBA would receive a 50 percent recovery in cash and a 39 percent stake in a new GM for its $20 billion in obligations; while bondholders, who own more than $27 billion in GM bonds and have the same legal rights as the unions, would only receive a mere 10 percent of the restructured company and essentially no cash.

The offer was made unilaterally, without any prior discussion or negotiation with bondholders and in spite of repeated calls for dialogue.
...
This offer demonstrates that the company and the auto task force, unfortunately, are pinning their hopes on an extremely risky and legally questionable turnaround in bankruptcy court, instead of engaging its lenders and workers in the very type of negotiations that could avoid such a fate.

Apparently the bondholders are preparing a counteroffer.

by Calculated Risk on 4/27/2009 04:38:00 PM

From the American Trucking Association: ATA Truck Tonnage Index Plunged 4.5 Percent in March

Click on graph for larger image in new window.

The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index fell 4.5 percent in March, marking the first month-to-month decrease of 2009. The gains during the previous two months, which totaled 4.5 percent, were erased with March’s drop. (February’s increase was revised down to 1.5 percent.) In March, the SA tonnage index equaled just 101.4 (2000 = 100), which is its lowest level since March 2002. The fleets did report higher volumes than in February, as the not seasonally adjusted (NSA) index increased 10.2 percent, but that is well below the 15 to 20 percent range that NSA tonnage usually rises from February to March. In March, the NSA index equaled 104.7.

Compared with March 2008, tonnage contracted 12.2 percent, which was the second-worst year-over-year decrease of the current cycle. In December 2008, the largest year-over-year contraction, tonnage dropped 12.5 percent from a year earlier.

ATA Chief Economist Bob Costello said he wasn’t too surprised at March’s reading. “Many fleets were telling us during March that freight was getting a little better. The problem is that freight should be significantly better in March, which is why the seasonally adjusted index fell,” Costello said. “While the industry is desperate for some positive news, it is unfortunate that March’s data suggests the industry has not hit bottom just yet.”

This suggests the economy was still very weak in March.