by Calculated Risk on 1/29/2009 11:44:00 PM

As a late night thread, here are some forecasts for Q4 GDP.

From the LA Times: Economy is going from bad to worse, reports show

Many economists think the economic output declined in the fourth quarter at an annual rate of 5% or more -- which would make it the worst quarter for the U.S. economy since 1982.

"It will be bad," said Nigel Gault, chief U.S. economist at IHS Global Insight, a forecasting firm in Lexington, Mass. He estimated that the economy shrank at a 5.3% annual rate in the three months that ended Dec. 31.
...
"It's going to confirm what we already know, and that is that we're in a severe recession," said Ben Herzon, senior economist with forecasting firm Macroeconomic Advisers in St. Louis, who expects the report to show a decline of 5.5%.

From CNNMoney:

The gross domestic product is expected to have declined by an annual rate of 5.4% in the fourth quarter, according to a consensus of economist expectations from Briefing.com.

Goldman Sachs most recent estimate is for real GDP to decline by 5.9%.

Northern Trust is forecasting a decline of 4.7%.

Looks like tomorrow will be interesting.

by Calculated Risk on 1/29/2009 09:17:00 PM

From Ruth Simon at the WSJ: Option ARMs See Rising Defaults (hat tip ShortCourage)

Nearly $750 billion of option adjustable-rate mortgages, or option ARMs, were issued from 2004 to 2007, according to Inside Mortgage Finance ... Rising delinquencies are creating fresh challenges for companies such as Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. that acquired troubled option-ARM lenders.
...
As of December, 28% of option ARMs were delinquent or in foreclosure, according to LPS Applied Analytics ... An additional 7% involve properties that have already been taken back by the lenders. ... Just over half of subprime loans were delinquent, in foreclosure, or related to bank-owned properties as of December. The nearly $750 billion of option ARMs issued from 2004 to 2007 compares with roughly $1.9 trillion each of subprime and jumbo mortgages in that period.

Nearly 61% of option ARMs originated in 2007 will eventually default, according to a recent analysis by Goldman Sachs ...

If 61% of the $750 billion in Option ARMs default, and with a 50% loss severity, the losses to lenders will be about $225 billion - far less than for subprime, but still a huge problem.

The key problem with Option ARMs is that they were used as affordability products, mostly in California and Florida, because buyers couldn't qualify for fixed rate mortgages or even regular ARMs. It should have been no surprise that most borrowers chose the negatively amortizing option; it was the only one they could afford!

by Calculated Risk on 1/29/2009 08:19:00 PM

It's been awhile, and by popular demand ...

Treasuries have rebounded somewhat since the beginning of the year, and there was tepid demand today for Five Year Treasuries, from Bloomberg: Treasuries Drop as Record Sale Draws Higher-Than-Forecast Yield

Treasuries plunged as the government sold a record $30 billion of five-year notes at a higher yield than forecast, indicating weak demand.

The auction, which caps a week when the Treasury raised $78 billion in notes and bonds, may signal investors will have trouble absorbing the as-much-as $2.5 trillion in debt the U.S. is likely to issue this year ...

“We’re seeing a bit of indigestion,” said Larry Dyer, a U.S. interest-rate strategist with HSBC Securities (USA)

Click on graph for larger image in new window.

The 10-year yield is at 2.82% today, well above the record low of 2.07% set on Dec 18th.

This graph shows the 10 year yield since 1962. The smaller graph shows the ten year yield since the start of 2008. In the bigger scheme, this has been a fairly small rebound in yield.

The yield on 3 month treasuries has risen to 0.22%. I guess that means less fear than a yield of zero!

The three month LIBOR has decreased to 1.17%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (improved) Imagine all those adjusted rate mortgage loans tied to treasuries or even the 3 month LIBOR? Those rates are looking pretty good.

The TED spread is at 0.94, still moving lower. (improved) The TED spread was stuck above 2.0 for some time. The peak was 4.63 on Oct 10th. The TED spread has finally moved below 1.0, although a normal spread is around 0.5.

The A2P2 spread as at 2.10. The spread has moved up slightly in recent days, but this spread has seen a huge decline in 2009. This is far lower than the record (for this cycle) of 5.86 after Thanksgiving, but still way too high. (improved).

This is the spread between high and low quality 30 day nonfinancial commercial paper. Right now quality 30 day nonfinancial paper is yielding close to zero. If the credit crisis eases, I'd expect a significant further decline in this spread - although this is good progress.

Federal Reserve Assets

The Federal Reserve assets decreased to $1.93 trillion this week from a high of over $2.3 trillion in December.

Note: the graph shows Total Factors Supplying Federal Reserve Funds and is an available series that is close to assets.

This is interesting too, from Bloomberg: U.S. Commercial Paper Falls Most on Record as Fed Buying Drops

Corporate borrowing in the commercial paper market shrank the most on record as companies sold less 90- day debt to the Federal Reserve.

U.S. commercial paper outstanding fell $98.8 billion, or 5.9 percent, to a seasonally adjusted $1.59 trillion during the week ended Jan. 28, the Fed said today in Washington. Financial issuance accounted for almost all of the drop, falling $93.5 billion, or 12.7 percent, to $641.8 billion.

The decline in the commercial paper market signals improved conditions as financial companies find other funding sources such as government-backed corporate bonds, Tony Crescenzi, chief bond- market strategist at Miller Tabak & Co. in New York, said in a note to clients today.

By these indicators, the Fed is making progress.

by Calculated Risk on 1/29/2009 05:36:00 PM

From CNBC: Bank Bailout Could Cost Up to $4 Trillion: Economists

Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.
...
The Wall Street Journal said government officials had discussed spending $1 trillion to $2 trillion to help restore banks to health, citing people familiar with the matter.
...
The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total.

We need more details ...

by Calculated Risk on 1/29/2009 02:48:00 PM

More cliff diving ...

From the International Air Transport Association: Cargo Plummets 22.6% in December (hat tip Bob_in_MA)

In the month of December global international cargo traffic plummeted by 22.6% compared to December 2007. The same comparison for international passenger traffic showed a 4.6% drop. The international load factor stood at 73.8%.

For the full-year 2008, international cargo traffic was down 4.0%, passenger traffic showed a modest increase of 1.6%, and the international load factor stood at 75.9%.

“The 22.6% free fall in global cargo is unprecedented and shocking. There is no clearer description of the slowdown in world trade. Even in September 2001, when much of the global fleet was grounded, the decline was only 13.9%,” said Giovanni Bisignani, IATA’s Director General and CEO.” Air cargo carries 35% of the value of goods traded internationally.
...
“2009 is shaping up to be one of the toughest years ever for international aviation. The 22.6% drop in international cargo traffic in December puts us in un-charted territory and the bottom is nowhere in sight. Keep your seatbelts fastened and prepare for a bumpy ride and a hard landing,” said Bisignani.
emphasis added