by Calculated Risk on 5/11/2009 04:19:00 PM

By popular demand, the 2nd graph is Doug's "Mega-Bear Quartet" that includes the Nikkei and NASDAQ bear 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".

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 5/11/2009 03:09:00 PM

"We are, as far as growth is concerned, around the inflection point in the cycle"
European Central Bank President Jean-Claude Trichet, May 11, 2009

From The Times: Britain may be on road to recovery, says OECD

The worst of Britain's recession may now be over, according to the Organisation for Economic Co-operation and Development (OECD).

The OECD, the umbrella group for the top 30 developed nations, said its indicators, which are considered to be a bellwether for the global economic outlook, pointed to a strong slowdown in the OECD area, but said that Britain, France and Italy were showing “tentative signs” of a pause in the slowdown.

Canada, Japan, Germany and the US, are still in the midst of a "strong slowdown".
...
“However, with the exception of China, where signs of a pause have also emerged, major non-OECD economies still face deteriorating conditions,” the OECD said.
...
“We are, as far as growth is concerned, around the inflection point in the (economic) cycle,” said Jean-Claude Trichet, head of the European Central Bank, at a G10 meeting in Switzerland.

More from Bloomberg: Trichet Says Global Economy Is Near Turning Point

Once global growth starts to pick up, central banks will have to scale back their support for the economy, Trichet said.

“Insistence is put on the exit strategy, on the medium- term path that permits us to go back to a normal situation, a sound and sustainable situation,” he said. At the same time, central banks will “do what is necessary in terms of extraordinary measures, as long as necessary,” he added.

It took just a couple of months to go from Great Depression II to "green shoots". Now Trichet is talking about an "inflection point" and central bankers scaling back their support - this seems a little premature.

by Calculated Risk on 5/11/2009 01:44:00 PM

On Saturday I excerpted from a NY Times article Shift to Saving May Be Downturn’s Lasting Impact. I argued:

The saving rate will probably continue to rise (an aging population usually pushes the saving rate higher) and a rising saving rate will repair household balance sheets, but ... this will also keep pressure on personal consumption.

First, here is a graph of the annual saving rate back to 1929.

Click on graph for large image.

Notice that the saving rate went negative during the Depression as household used savings to supplement income. And the saving rate rose to over 25% during WWII.

There is a long period of a rising saving rate (from after WWII to 1974) and a long period of a declining saving rate (from 1975 to 2008).

Some of the change in saving rate was related to demographics. As the large baby boom cohort entered the work force in the mid '70s, the saving rate declined (younger families usually save less), however I expected the saving rate to start to rise as the boomers reached their mid-40s (in the late '90s). This didn't happen.

Perhaps the twin bubbles - stock market and housing - deluded the boomers into thinking they had saved more than they actually had. Perhaps the boomers were deluded by bad economic analysis (see David Malpass: Running on Empty?)

Whatever the reason, I expect the saving rate to continue to rise over the next year or two. And that raises a question: what will be the impact on PCE of a rising saving rate?

I created the following scatter graph for the period from 1955 through Q1 2009. This compares the annual change in PCE with the annual change in the saving rate.

Note that R-squared is only .125, so there are other factors impacting PCE (like changes in income!).

But a rising saving rate does seem to suppress PCE (as expected). If the saving rate rises to 8% by the end of 2010, this suggests that real PCE growth will be about 1% below trend per year.

So with wages barely rising, and a rising saving rate suppressing PCE, I'd expect PCE growth to be sluggish for some time. And since PCE is usually one of the engines of recovery (along with residential investment), I expect the recovery to be very sluggish too (no Immaculate recovery).

by Calculated Risk on 5/11/2009 10:51:00 AM

“Certainly the task that we have in front of us is large, but we know that we can get it done. Today it’s more probable that we would need to resort to a bankruptcy process. But there’s still a possibility and an opportunity for it to be done outside of a bankruptcy.”
GM Chief Executive Officer Fritz Henderson

The NY Times is live blogging the conference call, but there doesn't sound like much news.

GM received three bids for Hummer, and expects a sale by the end of May.

On the bonds:

Mr. Henderson said the Treasury told G.M. to offer its bondholders up to a 10 percent stake in the company in return for the $27 billion in debt that they hold but did not give a reason why. Bondholders have said the stake is too small compared to what others are receiving.

And that is why a BK is likely ...

by Calculated Risk on 5/11/2009 08:58:00 AM

A few quotes from Paul Krugman in China ...

From Reuters: Krugman fears lost decade for US due to half-steps

"We're doing half-measures that help the economy limp along without fully recovering, and we're having measures that help the banks survive without really thriving," Krugman said.

"We're doing what the Japanese did in the nineties," he told a small group of reporters during a visit to Beijing.
...
"I'm mostly worried that the U.S. and the euro zone will have Japanese-type lost decades," he said.
...
"It's clear the administration won't take radical action to strengthen the banks any time soon," he said.

by Calculated Risk on 5/10/2009 11:25:00 PM

Click on graph for larger image in new window.

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

The S&P 500 is up 37.4% from the bottom, but still off 40.6% from the peak.

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

The second graph is the Shanghai SSE composite index. I used to post this graph with the subtitle "Cliff Diving"!

The Shanghai composite is up again tonight, and this index is now up 54% from the bottom, but still off 55% from the peak.

Both these markets show how the denominator impacts percentages. Imagine a market that peaked at 100 and dropped to 30. Then rallied back to 50. The market would the be up 67% from the bottom: 50 minus 30 = 20, divided by 30, but still off 50% from the peak. That is why it helps to report both numbers!

The S&P 500 is up 37.4% from the bottom, but that just puts it near the level following the early October crash.

The U.S. futures are off tonight:

CBOT mini-sized Dow

Futures from barchart.com

CME Globex Flash Quotes

And the Asian markets. The Asian markets are mixed.

And a graph of the Asian markets.

Best to all.

by Calculated Risk on 5/10/2009 06:44:00 PM

From the NY Times: White House Forecasts No Job Growth Until 2010

Speaking on C-SPAN, Christina Romer, chairwoman of the White House Council of Economic Advisers, said that she expected the G.D.P. to begin growing in the fourth quarter of this year. ... Ms. Romer also said that she expected unemployment to rise even after the economy turns, saying that the G.D.P. has to grow at a rate of about 2.5 percent before unemployment will fall. Before that happens, she said, it is “unfortunately pretty realistic” that the unemployment rate could reach 9.5 percent. A reasonable estimate for the G.D.P.’s growth rate in 2010, she said, is three percent.

Three percent is pretty close to trend growth. Although three percent is possible, I think a more sluggish recovery is likely. Note: Romer isn't forecasting a "V-shaped" recovery with strong growth coming out of the recession.

The usual engines of recovery - personal consumption expenditures (PCE) and residential investment (RI) - will both be under pressure. With nearly stagnant wages and a rising saving rate (my forecast based on households repairing balance sheets and an aging population), PCE growth will probably be below trend. And for RI, there is far too much inventory for any significant rebound in new home construction. Where will growth come from? Not investment - there is too much capacity.

Meanwhile the banking system is still very fragile, with the Obama administration gambling that the banks will earn their way out of the mess.

I'm still amazed by the bipolar outlooks of forecasters: just a few months ago, many forecasters were openly talking about a 2nd Great Depression (while I was writing about seeing a bottom in a few key leading indicators), and now some forecasters are talking about an immaculate recovery. Amazing.

by Calculated Risk on 5/10/2009 03:19:00 PM

From the NY Times: Manhattan Calling

... Great Recession prices are drawing even the most loyal outer-borough dwellers back to Manhattan. ...

Among the lures: $1,600 one-bedrooms on the Lower East Side. Lenient landlords who no longer require security deposits. And an overriding sense that an obscenely overpriced borough is now, well, slightly more reasonably overpriced.

... "[T]his was a unique moment in real estate history where renters have the upper hand, which seemed unbelievable a couple of years ago." [said] Keith O’Brien, a 30-year-old in marketing and public relations ...

In the first three months of the year, one-bedroom rents in Manhattan fell 6.7 percent compared with the previous year, while Brooklyn one-bedrooms dropped just 3.2 percent, according to data from Citi Habitats and Ideal Properties Group ... Other reports show some Manhattan rents down by 10 percent from a year ago.

... prices at upscale rental buildings like 45 Wall Street have come down significantly, discounted by 15 to 20 percent in recent weeks.

This is mostly anecdotal data, but it does appear apartment rents are falling in much of the country.

by Calculated Risk on 5/10/2009 11:48:00 AM

From Saturday Night Live sorry about the ad.

(For serious posts on banking scroll down)

by Calculated Risk on 5/10/2009 10:50:00 AM

From the Financial Times: US banks claim line softened on $74bn (ht Bo)

US banks have been given government assurances they will be allowed to raise less than the $74.6bn in equity mandated by stress tests if earnings over the next six months outstrip regulators’ forecasts, bankers said.

The agreement, which was not mentioned when the government revealed the results on Thursday, means some banks may not have to raise as much equity through share issues and asset sales as the market is expecting. It could also increase the incentive for banks to book profits in the next two quarters.

The banks have 28 days to announce their capital-raising plans and until November 9 to implement them. Wells Fargo and other banks that will have to raise capital told the Financial Times that if operating profits were greater than the government’s stress-case forecast for the second and third quarter, they would receive credit for the difference. That, in turn, would reduce the need to raise fresh equity from other sources.

The banks have a real incentive to book profits during Q2 and Q3 - something to remember.

For more, see the comments of Nouriel Roubini and Jan Hatzius (Goldman's chief economist) that I posted yesterday: The Race: Future Earnings vs. Writedowns

by Calculated Risk on 5/09/2009 10:31:00 PM

Here is another video from Jillayne Schlicke at a foreclosure auction on April 24, 2009 in Bellevue, WA.

Did he say "Calculated Risk"? (1 min 14 sec)

by Calculated Risk on 5/09/2009 06:07:00 PM

The results of the stress test showed that the bulk of future bank losses will come from accrual loan portfolios, as opposed to exotic securities (most of the writedowns to date have come from these securities). Here is the quote from the stress test results:

"The bulk of the estimated losses – approximately $455 billion – come from losses on the BHCs’ accrual loan portfolios, particularly from residential mortgages and other consumer‐related loans. ... Estimated possible losses from trading‐related exposures and securities held in investment portfolios totaled $135 billion."
Federal Reserve, The Supervisory Capital Assessment Program: Overview of Results, May 7, 2009

Here is Professor Roubini's comment (from Ten Reasons Why the Stress Tests Are “Schmess” Tests and Why the Current Muddle-Through Approach to the Banking Crisis May Not Succeed):

Second, the capital/needs of these banks depend on a race between retained earnings before writedowns/provisioning that will be positive given a high net interest rate margin and the losses deriving from further writedowns. It appears that regulators have overestimated the amount of such retained earnings for 2009-2010. The IMF recently estimated that retained earnings (after taxes and dividends) for all US banks – not just these 19 ones – would be only $300 bn total over the 2009-2010 period. The stress tests – instead – assumed much higher retained earnings - $362 bn - for these 19 banks alone for the 2009-2010 period in the more adverse scenario. Since these 19 banks account for about half of US banks assets if one were to use the IMF estimate of net retained earnings for these 19 banks their net retained earnings for 2009-2010 would be $150 bn rather than the $362 bn assumed by the regulators. While the IMF may have been too conservative in its estimates of net retained earnings it appears that regulators may have been too generous to these 19 banks in forecasting their earnings in an adverse scenario. Thus, ex-post capital needs will be significantly higher if net retained earnings turn out to be lower than assumed in the stress tests.

And a more optimistic view from Jan Hatzius:

"The enormous volume of securities writedowns in 2008 basically overwhelmed the pre-provision earnings power of the banking industry. ... We think that most of the loss recognitions in securities has now occurred. U.S. banks will still need to recognize substantial losses, but this will be mainly the provisions for whole loans that are spread out over a somewhat longer period of time, and somewhat more predictable, and therefore won't be as violent as the securities write-downs, and as a result these remaining losses can be offset via pre-provision earnings to a much greater degree."
Jan Hatzius, Chief Economist, Goldman Sachs, Conference Call, May 8, 2009 (no link)

This brings up a key concept:

Imagine a bank holds a RMBS (Residential Mortgage Back Security). Forget about tranches - just imagine the security is based on 100 mortgage loans. All of the loans are current, but the security is actively traded, and the price falls to 50 cents on the dollar because investors believe that there are many default (and losses) coming. The bank has lost 50% immediately. The bank holds the security, not the loans - so it is the change in the value of the security that hits their income statement.

Perhaps the bank believes the most profitable thing to do is just keep the loans in its own portfolio (fair value accounting principle called "highest and best use"). Now the bank also has a portfolio of 100 loans with exactly the same characteristics as the RMBS. The Fair Value estimate for income producing loans for which there is no available market or counterparty will be based on the Income approach (discounted future cash flows). As before all of the loans are current, so the bank takes writedowns based on estimates of discounted future cash flows (they are being held to maturity). As the losses, both current and future, become estimable, the bank takes the writedown.

A large portion of Alt-A (like Option ARMs) is held on bank balance sheets. So the building Alt-A crisis will be written down as the losses are estimable. Tanta mentioned this last year in: Subprime and Alt-A: The End of One Crisis and the Beginning of Another

If the "subprime crisis" was about "exotic securities," the "Alt-A crisis" is going to be about bank balance sheets.

And this brings up a second key point:

The Fed estimated both future losses and future earnings. As Dr. Roubini noted, there will be a race between losses and earnings - and if the Fed overestimated earnings or underestimated losses, the banks will need additional capital. If Hatzius is correct, the banks will win (or draw) the race - if Roubini is correct, the banks will lose.

But whether the banks win or lose the race, the rapidly rising defaults for Alt-A (and HELOCs and Jumbo Prime) loans will impact house prices in neighborhoods where the loans are concentrated (mostly mid-to-high end areas).

by Calculated Risk on 5/09/2009 04:27:00 PM

From the NY Times: Shift to Saving May Be Downturn’s Lasting Impact

The economic downturn is forcing a return to a culture of thrift that many economists say could last well beyond the inevitable recovery.

This is not because Americans have suddenly become more financially virtuous or have learned the error of their free-spending ways. Instead, these experts say, Americans may have no choice but to continue pinching pennies.

This shift back to thrift may seem to be a healthy change for a consumer class known for spending more than it earns, but there is a downside: American businesses have become so dependent on consumer spending that any pullback sends ripples through the economy.

The NY Times article notes the need to repair household balance sheets, but there is a second factor that will push up the saving rate too: changing demographics. Here is what I wrote a week ago:

Click on graph for large image.

This graph shows the saving rate starting in 1959 (using a three month centered average for smoothing) through the March Personal Income report. The saving rate was 4.1% in March.

This suggest households are saving substantially more than during the last few years (when the saving rate was close to zero). The saving rate will probably continue to rise (an aging population usually pushes the saving rate higher) and a rising saving rate will repair household balance sheets, but ... this will also keep pressure on personal consumption.

I expect the saving rate to continue to rise to 8% or so, although the future increases will probably not be as rapid as the last few months.

by Calculated Risk on 5/09/2009 10:17:00 AM

Jon Lansner at the O.C Register has some quotes on housing: When will housing bottom? Depends on who is talking! I'll add my two cents later ...

And for those that missed them, here are some reset / recast charts.

And a graph comparing job losses with previous recessions.

And a video of a mothballed condo project in Irvine, CA

Best to all

by Calculated Risk on 5/09/2009 12:37:00 AM

Results from "Stress Test"
Bogus Kabuki theatre.
Truth remains hidden.
by Soylent Green is People
From the FDIC: Kitsap Bank, Port Orchard, Washington, Assumes All of the Deposits of Westsound Bank, Bremerton, Washington

Westsound Bank, Bremerton, Washington, was closed today by the Washington Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver....

As of March 31, 2009, Westsound Bank had total assets of $334.6 million and total deposits of $304.5 million. ...

The transaction is the least costly resolution option, and the FDIC estimates the cost to its Deposit Insurance Fund will be $108 million. Westsound Bank is the 33rd FDIC-insured institution to be closed this year and the second in Washington. The last bank to be closed in the state was the Bank of Clark County on January 16, 2009.

by Calculated Risk on 5/08/2009 08:31:00 PM

From the WSJ: Banks Won Concessions on Tests

The Federal Reserve at the last minute significantly scaled back the size of the capital hole facing some of the nation's biggest banks, following days of intense bargaining over the stringency of the stress tests.
...
When the Fed last month informed banks of its preliminary stress-test findings, executives at banks including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. were furious ...

At Fifth Third, the Fed was preparing to tell the Cincinnati-based bank to find $2.6 billion in capital, but the final tally dropped to $1.1 billion.

by Calculated Risk on 5/08/2009 06:13:00 PM

Before reading, please see Tanta's: Reset Vs. Recast, Or Why Charts Don't Match

"Reset" refers to a rate change. "Recast" refers to a payment change.

Here are two Credit Suisse charts:

Click on image for larger graph in new window.

The first chart is from Business Week in April: Good News: Option ARM Resets Delayed

The reset and recast confusion continues! The x-axis is labeled "months to 1st reset", but the notes to the graph says: "estimated recast schedule".

And here is more from a Credit Suisse research report released in February (no link):

It appears Credit Suisse is using recast dates for Option ARMs and reset dates for all other loans. Resets are not a huge problem with low interest rates, but recasts could be significant.

Looking at these charts it would be easy to conclude that the recast problem last through 2012. However there is a difference between the original recast date, and the actual recast date - because negatively amortizing loans hit the recast ceiling earlier than the original forecast. I suspect the peak in recasts for Option ARMs will be in 2010.

by Calculated Risk on 5/08/2009 04:39:00 PM

From the FDIC: FDIC to Open a Temporary East Coast Satellite Office

The Federal Deposit Insurance Corporation (FDIC) today announced it will open a temporary satellite office in Jacksonville, Florida, to manage receiverships and to liquidate assets from failed financial institutions primarily located in the eastern states.
...
The new office will provide facilities for up to 500 nonpermanent staff and contractors. ... Throughout its history, the FDIC has used these offices to keep temporary asset resolution staff closer to the concentration of failed bank assets they oversee. As the work diminishes, the temporary satellite offices are closed.

Unrelated - of course - BKUNA has been given an extension until May 14th. From the Miami Herald: N.Y. investment firm courting BankUnited

A third potential buyer has emerged for ailing BankUnited.

JC Flowers & Co., a New York investment firm run by J. Christopher Flowers, is looking at acquiring the Coral Gables-based thrift, according to a person familiar with the situation.

BankUnited, the main unit of BankUnited Financial Corp., is under federal regulatory orders to merge or find a buyer to strengthen its capital base. The Federal Deposit Insurance Corp. extended until May 14 the deadline for prospective investors or buyers of the thrift to submit their bids.

by Calculated Risk on 5/08/2009 03:08:00 PM

I took this video this morning (my first YouTube, so please excuse the quality).

This is a project in Irvine, CA called Central Park West. The project was built by Lennar and mothballed in 2007. I was surprised the area was open and fountains were all running, but unfortunately the information center was closed.

New condos like this are shadow inventory - they are not included in the Census Bureau new homes report, and they are not listed in the MLS. But they do exist.

Here are the Las Vegas "Manhattan West" photos mentioned in the video.

by Calculated Risk on 5/08/2009 01:03:00 PM

From Bloomberg: Fannie Mae to Tap $19 Billion in Treasury Capital

Fannie Mae ... asked the U.S. Treasury for a $19 billion capital investment and raised the possibility that its long-term survival may be dependent on continued government funding.

Fannie Mae, which took $15.2 billion in aid on March 31, cited the “unprecedented” housing market slump and government- mandated programs that are creating “conflicts in strategic and day-to-day decision making,” according to company filings today with the Securities and Exchange Commission.

Here is the section from the SEC 10-Q filing:

We face a variety of different, and potentially conflicting, objectives, including:

providing liquidity, stability and affordability in the mortgage market;

immediately providing additional assistance to the mortgage market and to the struggling housing market;

limiting the amount of the investment Treasury must make under our senior preferred stock purchase agreement with Treasury in order to eliminate a net worth deficit;

returning to long-term profitability; and

protecting the interests of the taxpayers.

These objectives create conflicts in strategic and day-to-day decision-making that could lead to less than optimal outcomes for some or all of these objectives. For example, limiting the amount of funds Treasury must invest in us under the senior preferred stock purchase agreement in order to eliminate a net worth deficit could require us to constrain some of our business activities, including activities targeted at providing liquidity, stability and affordability to the mortgage market. Conversely, to the extent we expand our efforts to assist the mortgage market, our financial results are likely to suffer, at least in the short term, which will increase the amount of funds that Treasury is required to provide to us and further limit our ability to return to long-term profitability. We regularly consult with and receive direction from our conservator on how to balance our objectives.

Accordingly, we currently are primarily focusing on the first two objectives listed above ...

Notice they are concentrating on the first two objectives above, and that does not include "protecting interest of taxpayers", "returning long-term profitability" or "limiting the investment from Treasury".