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

Update: see bottom of post for Q&A.

"While we seeing some initial signs of consumer credit stability, we are not certain that this trend will continue."
JPMorgan CEO Jamie Dimon, Oct 14, 2009

A few excerpts (ht Brian):

JPM:

“We continue to see initial signs of stability in the consumer, early bucket delinquency trends, but we are not ready to declare that's a sustained trend but it is continuing to be what we actually observe. Another overall comment is that as far as the impact of foreclosures moratorium, the trial mods which have been very active in doing, and just the overall extension of processing of REO through the courts, those things are obviously having an affect on overall delinquency and stats but we are doing everything we can to stay on top of the income statement taking recognizing losses through charge offs and adding to reserves without regard for the impact that those factors would be causing in the overall delinquency.

Looking ahead to what we see, we are not changing any of these numbers [loss estimatse by loan category] and obviously whether we advance to these levels is going to be a function of whether some of the early bucket delinquency trends that we described continue or not. But we measure impairment at sub portfolio levels for purposes of accounting impairments, and so as we look at the prime portfolio, not option arms just the prime mortgage portfolio, we see some weakness. We obviously measure that in terms of expected lifetime losses on that portfolio, and have added $1.1 billion, that is put on the books in the form of a loan loss reserve as opposed to an incremental mark.

Brian notes that these comments about prime loans relate to the purchased WaMu portfolio, and that this charge is over and above the $30B write down they took at the time of the acquisition.

This table on Card Services (Managed) is from the JPMorgan investor presentation.

Click on table for larger image in new window.

The net charge-off rate rose to 9.41% in Q3, and JPM expects charge offs to hit 11% on the non-Wamu portfolio in Q1, Wamu losses could approach 24%!

Credit card losses tend to track unemployment, so the charge-off rate will probably stay elevated for some time.

Update from the Q&A:

Analyst: Loans were down about 5% linked quarter 16% year-over-year. Is that supply or demand, what are some of the ins and outs there?

JPM: Consumer portfolios, you have run off portfolios from Washington mutual and in retail, some tightening of underwriting standards in those businesses generally. So expect that at the origination levels, that for a period of time here, we are going to have downward pressure on those balances. We're in the business of making loans against our underwriting standards today. So it is active supply, meeting demand on that score. On the commercial side, you have seen it a little further down this quarter, and that is you know more, it is a little bit of everything but it is more demand clearly because we see extended credit lines utilized at the lowest levels of all time. You can see a swing in those numbers as soon as confidence returns in our commercial clients and they have some use for that money.

On the housing market:

Analyst: Would you comment on California housing market?

JPM: In the major MSAs you have seen a stabilization in fact an increase in the last couple of months, call it stabilization of home prices. That was more true for lower priced than higher priced but also happens in places where price is down dramatically, and obviously parts of Florida are still bad, parts of California we are seeing some improvement. We see that improvement in areas with a high percent of sales from forecloses and also in areas where foreclosure sales aren't as high of a percent. So I would agree with you there's a lot of distortion in that number but all things being equal it is a good fact not a bad fact.

Comment on delinquency trends and the denominator effect:

Analyst: I was hoping just to flush out some comments with respect to delinquency trends in home lending, can you talk to stabilization on Slide 17 on, in the slide deck, it looks like all of those lines are going up and it can be the discrepancy between percentage, delinquencies, come down maybe you can talk to that

JPM: Clearly on the overall 30 plus you get the distortion. I won't try to take that number down too much. You see those, in percentage terms on 17 you do see those affects rolling through. On a dollar basis it is stabilization that we are seeing across those portfolios and again it is portfolios [denominator] coming down.

On the economy

Analyst: As we look at the overall numbers they can be confusing as to the economic outlook but as you get the data kind of first-hand from people that are running the businesses that are dealing with small business, mid size and consumer, what does it tell you about the economic outlook?

JPM: You actually all see pretty much what we see, and there seems to be in the environment, in terms of consumer spending, confidence, in terms of delinquencies a little bit of improvement, and in home price. Those are actual data, and you know that can be forming the base of a recovery or not but we are not going to spend a lot of time guessing about that. The only thing anecdotally is that business, small business, middle market, large corporate, they kind of poised and waiting to see if the recovery is taking hold, they have growth plans, to me it would be a good sign if that's true because maybe, you know, people get a little more comfortable taking risks and making more investments in the future.”

On mortgage mods

Analyst: The mortgage mod, can you tell us has the process smoothed at this point? What the pipeline looks like and how long do you think its going be to get that pipeline fulfilled.

JPM: Growing pains in these processes. So we have been active. One thing it is just still early to see how effective people are in making their payments which is obviously one important thing but the other issue there is just people complying with all of the terms of what is required under the Governments guidelines in terms of amount, types of documentation before it can be declared [permanent]. So there's still I would call it growing pains in the process a little early to say it has stabilized and worked through. A lot of energy going into it adding a lot of people to it, ourselves and across the industry.

Analyst: Do you see this as something that's going to be permanent in the business, is this a pressure that will go away or is this something you guys have to live with to some degree or another permanently?

JPM (Dimon): The right way to look at it is it is so large the problem in housing today we certainly hope there’s nothing like this ever again. We have always had work out the department, the REO department, and it is just a prime delinquency that is ten times what you would have are expected, ten times expect in almost any environment. So it will come down to a much more normal thing eventually and you will have delinquency and charge offs and foreclosure that are just much smaller than they are today. It will never be this, probably never be this big again in our lifetime.

by Calculated Risk on 10/14/2009 08:30:00 AM

On a monthly basis, retail sales decreased 1.5% from August to September (seasonally adjusted), and sales are off 5.7% from September 2008 (retail ex food services decreased 6.4%).

Excluding motor vehicles, retail sales were up 0.5%.

Click on graph for larger image in new window.

This graph shows real retail sales (adjusted with PCE) since 1992. This is monthly retail sales, seasonally adjusted.

NOTE: The graph doesn't start at zero to better show the change.

This shows that retail sales fell off a cliff in late 2008, and appear to have bottomed, but at a much lower level.

The second graph shows the year-over-year change in nominal and real retail sales since 1993.

To calculate the real change, the core PCI price index from the BLS was used (August prices were estimated as the average increase over the previous 3 months).

Real retail sales (ex food services) declined by 7.9% on a YoY basis.

Here is the Census Bureau report:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $344.7 billion, a decrease of 1.5 percent (±0.5%) from the previous month and 5.7 percent (±0.7%) below September 2008. Total sales for the July through September 2009 period were down 6.6 percent (±0.3%) from the same period a year ago. The July to August 2009 percent change was revised from +2.7 percent (±0.5%) to +2.2 percent (±0.2%).

The large decrease in retail sales was because of the end of Cash-for-clunkers in August. Excluding autos, retail sales increased in September, but are still far below year ago levels.

by Calculated Risk on 10/13/2009 10:58:00 PM

From Steven Pearlstein at the WaPo: Don't Reinflate the Old Bubbles

What we're witnessing here is pretty simple: another bubble in financial assets. All that "liquidity" created by the Federal Reserve and other central banks has accomplished its task and prevented a global financial meltdown. ...

Many analysts now look at the economy and conclude that unemployment is still way too high and the threat of inflation still way too low for the Fed to even think about beginning to raise interest rates again. ...

The right policy response is for the Fed to begin withdrawing some of this extraordinary monetary stimulus even as the rest of the government steps up its effort to stimulate the real economy. That means more money for extended unemployment benefits; more aid to the states so that they can maintain the most vital public services; and more money to expand mass transit, state college and university systems, efficient energy production and basic scientific research. ...

What would surely not be good policy, by the way, is to extend and expand the current tax break for first-time home buyers that is set to expire at the end of the year, as many in Congress are now advocating.

It is tricky to balance monetary and fiscal policy. It appears the next stimulus package will include an extension to the inefficient first-time home buyer tax credit, and will not include some of the items Pearlstein suggests.

by Calculated Risk on 10/13/2009 07:54:00 PM

“You can’t modify someone if they don’t have income or a job. We have to be realistic going forward. If we are going to play a numbers game, we are going to see a smaller percentage of borrowers in default able to be modified. It’s an unfortunate and difficult fact we are going to have to face.”
John Courson, president and CEO of the MBA, Oct 13, 2009.

Quote from Denver Business Journal: MBA: Creative efforts needed to deal with foreclosures

Maybe those NINJA loans weren't such a good idea either? (No income, no job and no assets)

The MBA also released their economic forecast for 2010: MBA Expects Economic Growth to Slow in First Half of 2010 Before Picking Up in Second Half, Originations Volume to Hit $1.5 Trillion

MBA expects economic growth to continue through the rest of 2009 before slowing in the first half of 2010. Unemployment is expected to climb to 10.2 percent by the middle of 2010 before beginning to moderate as economic growth resumes sustained growth in the second half of the year.

Although I think this is optimistic, it does highlight a key point.

The key drivers of positive growth in the second half of 2009 are inventory restocking, growth in residential investment (some increase in single family starts from the very depressed levels earlier this year), exports, and the fiscal stimulus.

The impact of the fiscal stimulus will wane in early 2010 (the stimulus won't add to GDP because it is at the peak level right about now, and will act as a drag later in 2010 as the American Recovery and Reinvestment Act starts to wind down).

Inventory restocking is transitory, and without an increase in end demand, inventory investment will slow.

And any growth in residential investment will probably be sluggish, as Fed Vice Chairman Kohn noted today.

I guess that leaves exports ... but I suspect any growth in early 2010 will be very sluggish.

by Calculated Risk on 10/13/2009 04:12:00 PM

Fed Vice Chairman Donald Kohn spoke at the National Association for Business Economics conference in St. Louis, Missouri today: The Economic Outlook

Kohn outlines why he expects a moderate recovery (not V-shaped), and why he believes the risks to inflation are on the downside ...

A few excerpts:

All told, I expect that the recovery in U.S. economic activity will proceed at a moderate pace in the second half of this year before strengthening some in 2010. As we move into and through next year, inventory investment is likely to play a smaller role in supporting the growth of output, and aggregate activity should increasingly be propelled by stronger gains in final demand ...

[W]hy do I expect a gradual strengthening of economic activity? The fiscal stimulus program enacted earlier this year is likely playing a role, and it will continue to do so for a while as the states spend their stimulus funds to pay for infrastructure projects, hire more teachers, and finance other types of spending. But what will support economic activity as fiscal stimulus wanes?

Most importantly, support for private demand should come from a continuation of the improvements we've seen lately in overall financial conditions. Low market interest rates should continue to induce savers to diversify into riskier assets, which would contribute to a further reversal in the flight to liquidity and safety that has characterized the past few years. As the economy improves and credit losses become easier to size, banks will be able to build capital from earnings and outside investors, making them more able and willing to extend credit--in effect, allowing the low market interest rates to show through to the cost of capital for more borrowers. A more stable economic environment and greater availability of credit should contribute to the restoration of business and household confidence, further spurring spending.

An encouraging aspect of the improvement in economic and financial conditions in recent months has been the firming in house prices that I mentioned earlier. House prices can affect economic activity through several channels. One channel is through the influence of house prices on the net worth of households and, thereby, on consumer spending. Another channel is through the effect of anticipated capital gains or losses from investing in residential real estate on the demand for housing. Finally, greater stability in house prices should help reduce the uncertainty about the value of mortgages and mortgage-related securities held on the balance sheets of banks and other financial institutions, which should have a positive effect on their willingness to lend. This circumstance should nourish a constructive feedback loop between the financial sector and the real activity.

Given this possibility, another reasonable question might be, Why do I expect the economic recovery to be so moderate? To be sure, many times in the past, a deep recession has been followed by a sharp recovery. But, for a number of reasons, I don't think a V-shaped recovery is the most likely outcome this time around. First, although financial conditions are improving and market interest rates are very low, credit remains tight for many borrowers. In particular, the supply of bank credit remains very tight, and many securitization markets that do not enjoy support from the Federal Reserve or other government agencies are still impaired. Consumers as well as small and medium-sized businesses are especially feeling the effects of constraints on credit availability. Banks are still rebuilding their capital positions, and their lending will be held back by the need to work through the embedded losses in their portfolios of consumer and commercial real estate loans. Over time, as I already have noted, bank balance sheets should improve, and the supply of bank credit should ease. But the financial headwinds are likely to abate slowly, restraining the economic recovery.

In addition, I do not anticipate that the recovery in homebuilding will exhibit its typical cyclical pattern. Even though the decline in residential construction began well in advance of the overall contraction in real activity, the sector continues to have an oversupply of vacant homes. To be sure, by August, the inventory of unsold, newly built single-family houses had fallen appreciably from its peak level in the summer of 2006. Nonetheless, when compared with still low levels of sales, the supply of new houses remains elevated. In addition, the overhang of vacant houses on the market for existing homesis sizable, and the pace of foreclosures is likely to remain very elevated for a while, which should further add to that overhang. Thus, even with affordability quite favorable and house price expectations brighter, I anticipate a relatively subdued pickup in housing starts over the coming year.

In the business sector, the extraordinary amount of excess capacity is likely to be another factor tempering the rate of recovery. In manufacturing, the utilization rate currently is below 67 percent--noticeably less than the low points reached in prior post-World War II recessions. I expect that the wide margin of unused capacity, combined with the tight credit conditions faced by firms that have to rely primarily on bank lending, will lead many businesses to be quite cautious about the pace at which they increase their capital spending.

In part, the gradual pace I expect in the recovery of the economy toward full employment reflects the process of shifting the composition of aggregate demand and the way it is financed in response to the events of the past few years. In particular, consumers probably will do more saving out of their income, reflecting the likelihood that household net worth will be lower relative to income than over the past decade or so and that credit, appropriately, will be somewhat less available than during the boom that preceded the crisis. In addition, housing is almost certainly going to be a smaller part of the economy than it was earlier in this decade, as financial institutions maintain tighter underwriting standards that also more adequately reflect underlying risks. Such an increase in private saving propensities and a reduced demand for residential capital should prompt movements in relative prices and other factors that will, in turn, make room for a larger role for business investment and net exports in overall economic activity.

The transition to full employment and the complete emergence of this new configuration will take time, in part because the rebalancing of the economy involves repairs to balance sheets, the movement of capital and labor across sectors of the economy, and shifts in the global pattern of production and consumption--adjustments that are likely to be gradual under any conditions. Current circumstances, however, may slow the re-equilibration process more than might otherwise be the case because of the essential role of changes in the relative cost of finance in the adjustment process. But with the nominal federal funds rate essentially constrained at zero, and spreads in markets already having narrowed, reductions in the effective cost of capital will mainly take place as conditions at financial institutions improve and lenders ease borrowing standards, which as I have already discussed I expect to happen gradually.

As noted earlier, I expect that inflation will likely be subdued, and that, for a while, the risk of further declines in underlying rates of inflation will be greater than the risk of increases. That outlook rests importantly on two judgments: First, that the economy will be producing well below its potential for some time, which will directly restrain production costs and profit margins; and second, that inflation expectations are more likely to fall than rise over time as the level of real activity remains persistently less than its potential and actual inflation remains low.
...
But it's not the current level of inflation or of output that figure into our policy decisions directly--rather, it is the expected level some quarters out, after the lags in the effects of policy actions have worked themselves out. In that regard, the projection of only a gradual strengthening of demand and subdued inflation imply that that these gaps--of inflation and output below our objectives--are likely to persist for quite some time. In these circumstances, at its last meeting, the FOMC was of the view that economic conditions were likely to warrant unusually low levels of interest rates for an extended period.
emphasis added