by Calculated Risk on 3/13/2009 10:37:00 AM

Note: The Daily Show website is a little slow today (for some reason!)

Here is the full episode.

Here are three short uncensored excerpts (warning: explicit language).

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Unedited Interview Pt. 1

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

Part II.

Part III.

by Calculated Risk on 3/13/2009 10:14:00 AM

"Before we do the credit cards, we are actually not done with the mortgage [crisis] - the worst of that is yet to come in fact. The thing about mortgages is you can predict when they are going to reset and you can sort of see what is coming. We easily have another 12 to 18 months of pretty ugly times in terms of mortgage resetting. ... Credit cards are next."
FICO (formerly Fair Isaac) CEO and Michael Porter, CNBC

Porter also defends FICO scores as useful (no surprise), and I think he is mostly correct. Unfortunately during the housing bubble, many lenders used creditworthiness (and FICO scores) as the only measure to allow a loan. Historically lenders used the "Three C's": creditworthiness, capacity, and collateral.

On capacity, during the bubble, lenders qualified borrowers at teaser rates - or the Neg Am rate for Option ARMs. They didn't consider if the borrower could meet the fully amortized rate. On collateral, lenders just assumed housing prices would increase and 100%+ LTV loans were common. All three C's still matter.

by Calculated Risk on 3/13/2009 08:30:00 AM

The sharp decline in both imports and exports continues to be an important story.

The Census Bureau reports:

[T]otal January exports of $124.9 billion and imports of $160.9 billion resulted in a goods and services deficit of $36.0 billion, down from $39.9 billion in December, revised. January exports were $7.6 billion less than December exports of $132.5 billion. January imports were $11.5 billion less than December imports of $172.4 billion..

Click on graph for larger image.

The first graph shows the monthly U.S. exports and imports in dollars through January 2009. The recent rapid decline in foreign trade continued in January. Note that a large portion of the decline in imports is related to the fall in oil prices - but not all.

The graph includes both goods and services. The import and export of services has held up pretty well; most of the collapse in trade has been in goods. Imports of goods has declined by one third from the peak of last July!

The second graph shows the U.S. trade deficit, with and without petroleum, through January.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Import oil prices fell to $39.81 in January, and import quantities decreased too - so the petroleum deficit declined by $4 billion.

The trade deficit is now mostly China ($20.6 billion NSA in January) and oil.

by Calculated Risk on 3/12/2009 09:15:00 PM

The market rallied back to 1997 and ...

The Fed reported that household wealth plunged, from MarketWatch:

U.S. households saw their net worth fall by $11.2 trillion, or 18%, to $51.5 trillion at the end of 2008, wiping out five years of gains

Here are several graphs on household wealth and household equity (record low) based on the Fed's Flow of Funds report.

Meanwhile, the employment outlook is still grim. See: Unemployment Claims: Continued Claims at Record 5.3 Million

But retail sales should some signs of stabilization - at a much lower level - off almost 10% from a year ago. There are reasons to be skeptical of the data, but this is a small positive.

Also, the counterparty risk issue with mortgage insurers is heating up again.

Another interesting day ... best to all.

by Calculated Risk on 3/12/2009 06:41:00 PM

Tell me if you've heard this somewhere before ...

Earlier today from MarketWatch: Lewis warns against U.S. seizures, says bank doesn't need more U.S. aid

Lewis stressed that he thinks Bank of America won't need more public support.

"I'm confident we'll pass the stress test," he said

And from CNBC: Citigroup Does Not Need Further US Capital Injections: Chairman

by Calculated Risk on 3/12/2009 05:20:00 PM

A couple of mortgage insurer stories ...

From the WSJ: MBIA's Split of Businesses Raises Ire of Banks, Hedge Funds

Representatives of about 15 financial institutions will meet Thursday with New York State Insurance Superintendent Eric Dinallo to complain about MBIA Inc.'s decision to split its bond-insurance unit into two companies...

The group includes many banks that feel disadvantaged by MBIA's move last month to separate its municipal-bond insurance business from its commitments to insure mortgage-backed bonds and other structured securities. The banks are counterparties to MBIA on derivatives called credit-default swaps that were written on securities they own ... These institutions were left holding contracts with a financially weaker insurer when MBIA transferred about $5 billion in capital from its main unit to another company that guarantees only U.S. municipal bonds.

And from Dow Jones (no link): MGIC Dn 35% As Payment-Deferral Points To Liquidity Issues

MGIC Investment Corp. ... said in a late-Wednesday regulatory filing it deferred its interest payment on some debentures by 10 years.

The filing, which revealed MGIC is likely having liquidity issues ...

... Fitch Ratings put its credit ratings on MGIC and two of its units on watch for possible downgrade Thursday. ... Mortgage insurers such as MGIC cover potential lender losses on loans to borrowers who can't come up with a 20% down payment. The sector continues to struggle with soaring claims and declining new business ...

Actually the mortgage insurers were lucky - they were cut out of the worst deals because Wall Street happily securitized 100% financing with 2nds and no MI. But the losses are still piling up. And so are the counterparty risks ...

by Calculated Risk on 3/12/2009 03:58:00 PM

The only thing that is certain recently is volatility.

DOW up 3.5%

S&P 500 up 4.1%

NASDAQ up 4.0%

The S&P has now rallied back to 1997 prices!

Click on graph for larger image in new window.

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

This is still 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.

by Calculated Risk on 3/12/2009 03:01:00 PM

From Dow Jones: S&P: Home-Loan Delinquencies Grow In January

Standard & Poor's said delinquencies of home-related loans climbed in January, with the rate surging in particular from December for home-equity lines of credit and prime-rated jumbo mortgages.
...
S&P said the smallest month-to-month increase as of the January distribution date was subprime mortgages ... The delinquency rates, though, still range from 42% of current total pool balances for 2005 to 49% for 2007.
emphasis added

Subprime delinquency rates are still much higher than other categories, but HELOCs and Jumbo primes delinquencies are increasing at a faster rate. The delinquencies are moving up the value chain - we're all subprime now!

by Calculated Risk on 3/12/2009 12:13:00 PM

The Fed released the Q4 2008 Flow of Funds report today: Flow of Funds.

Click on graph for larger image in new window.

This is the Households and Nonprofit Net Worth as a percent of GDP.

This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages).

This ratio was relatively stable for almost 50 years, and then ... bubbles!

Rex Nutting at MarketWatch has more: Household net worth plunges 18% in 2008

Hit by the double whammy of declining home prices and a falling stock market, U.S. households saw their net worth fall by $11.2 trillion, or 18%, to $51.5 trillion at the end of 2008, wiping out five years of gains ...

Household percent equity was at an all time low of 43.0%.

This graph shows homeowner percent equity since 1952.

When prices were increasing dramatically, the percent homeowner equity was declining because homeowners were extracting equity from their homes. Now, with prices falling, the percent homeowner equity is Cliff Diving!

Note: approximately 31% of households do not have a mortgage. So the 50+ million households with mortgages have far less than 43.0% equity.


The third graph shows household real estate assets and mortgage debt as a percent of GDP. Household assets as a percent of GDP is now declining rapidly. Mortgage debt as a percent of GDP was up slightly in Q4, and is only declining slowly.

It's an old lesson: Assets values can fall quickly, but debt lingers!

by Calculated Risk on 3/12/2009 08:30:00 AM

On a monthly basis, retail sales decreased slightly from January to February (seasonally adjusted), but sales are off 9.5% from February 2008 (retail and food services decreased 8.6%). Automobile and parts sales decline sharply 4.3% in February (compared to January), but excluding autos, all other sales climbed 0.7%.

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

Click on graph for larger image in new window.

To calculate the real change, the monthly PCE price index from the BEA was used (February PCE prices were estimated as the same as January).

Although the Census Bureau reported that nominal retail sales decreased 9.5% year-over-year (retail and food services decreased 8.6%), real retail sales declined by 10.0% (on a YoY basis). The YoY change decreased slightly from last month.

The second 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, but have been stable the last three months.

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 February, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $346.8 billion, a decrease of 0.1 percent (±0.5%)* from the previous month and 8.6 percent (±0.7%) below February 2008. Total sales for the December 2008 through February 2009 period were down 9.4 percent (±0.5%) from the same period a year ago. The December 2008 to January 2009 percent change was revised from +1.0 percent (±0.5%) to +1.8 percent (±0.2%).

All things considered, this is a decent retail sales report. Q1 retail sales are still about 1.4% below sales in Q4, but it appears that sales might have stabilized - especially ex-auto.

It now appears that Q1 GDP will be very weak - because investment is falling off a cliff and there is a significant inventory correction in progress - but Q1 PCE might only be slightly negative.

Note: February is typically the weakest retail month of the year, so the seasonal adjustment is the largest - and during periods of rapid change this can distort the data a little.

by Calculated Risk on 3/12/2009 08:29:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending March 7, the advance figure for seasonally adjusted initial claims was 654,000, an increase of 9,000 from the previous week's revised figure of 645,000. The 4-week moving average was 650,000, an increase of 6,750 from the previous week's revised average of 643,250.
...
The advance number for seasonally adjusted insured unemployment during the week ending Feb. 28 was 5,317,000, an increase of 193,000 from the preceding week's revised level of 5,124,000. The 4-week moving average was 5,139,750, an increase of 124,250 from the preceding week's revised average of 5,015,500.

Click on graph for larger image in new window.

The first graph shows weekly claims and continued claims since 1971.

The four week moving average is at 650,000 the highest since 1982.

Continued claims are now at 5.317 million - the all time record.

The second graph shows the 4-week average of initial weekly unemployment claims (blue, right scale), and total insured unemployed (red, left scale), both as a percent of covered employment.

This normalizes the data for changes in insured employment, and shows the initial unemployment and continued claims are both at the highest level since the early '80s.

Another very weak report.

by Calculated Risk on 3/11/2009 11:33:00 PM

Thursday morning: Retail sales for February.

The futures: (U.S. off a little)

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets. (Nikkei off about 1.0%)

And a graph of the Asian markets.

Best to all.

by Calculated Risk on 3/11/2009 07:01:00 PM

This is amazing ...

From the Boston Globe: Now-needy FDIC collected little in premiums (ht Atrios)

The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

... a booming economy left banks flush with cash, and by 1996 the insurance fund was considered so large that it could grow through interest payments and fees charged only to banks with high credit risk. Congress agreed that premiums didn't need to be collected if the fund was sustained at a level that was considered safe. Thus, about 95 percent of banks paid no premiums from 1996 to 2006 ...

James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because "the fund became so large that interest income on the fund was covering the premiums for almost a decade." There were relatively few bank failures and no projection of the current economic collapse, he said.

"Obviously hindsight is 20-20," Chessen said.

Hoocoodanode?

by Calculated Risk on 3/11/2009 04:56:00 PM

Press Release: Freddie Mac Reports Fourth Quarter and Full-Year 2008 Financial Results

Freddie Mac today reported a net loss of $23.9 billion ...

For the full-year 2008, the company reported a net loss of $50.1 billion ...

Fourth quarter 2008 results were driven primarily by net mark-to-market losses of $13.3 billion on the company’s derivative portfolio, guarantee asset and trading securities due to the impacts of spread widening and declines in interest rates. In addition, the company recorded $7.2 billion in credit-related expenses related to the continued deterioration in economic conditions during the fourth quarter, including a rapid deterioration in labor markets, steeper declines in home prices, and a drop in consumer confidence to record lows. Results were also impacted by security impairments on the company’s available-for-sale securities of $7.5 billion primarily due to sustained deterioration in the performance of the underlying collateral on the company’s non-agency mortgage-related securities.

... Pursuant to Treasury’s funding commitment under the Purchase Agreement, the Director of the Federal Housing Finance Agency (FHFA) has submitted a request to Treasury for funding in the amount of $30.8 billion. The company expects to receive such funds in March 2009.
emphasis added

The $30.8 billion in funding is in line with the announcement in January.

by Calculated Risk on 3/11/2009 04:07:00 PM

The markets were calm today ... so here is something else.

Earlier today, the BLS released the state unemployment rates for January. Four states are now above 10%: Michigan, South Carolina, Rhode Island and California.

Click on graph for larger image in new window.

This graph shows the unemployment rate by state (and D.C.) for January 2008 and January 2009.

The unemployment rate has increased significantly in every state, and more than doubled in Hawaii and Alabama over the last 12 months - and has nearly doubled in North Carolina, Indiana and Oregon.

There is pain everywhere.

by Calculated Risk on 3/11/2009 03:04:00 PM

From Rex Nutting at MarketWatch: Budget deficit widens 10% as receipts fall to 14-year low

U.S. federal government budget widened to $192.8 billion in February ... the second largest monthly deficit on record ... receipts dropped 17% to $87.3 billion, the lowest since February 1995.

In February, individual income taxes fell 64% to just $8.7 billion. That's the lowest monthly total for individual income taxes since May 1985.

Ouch!

by Calculated Risk on 3/11/2009 12:45:00 PM

From James Saft at Reuters: Builder loans are the forgotten land mine in U.S. credit crisis (ht Michael)

Banks in the United States face a new source of write-downs and failures in the coming year, as loans made to developers to finance residential and commercial property development rapidly go bad.
...
Called acquisition, construction and development, or ADC, loans, they total 8.4 percent of all bank loans, just below a 30-year peak, and are used by developers to buy land, put in infrastructure and construct housing or commercial space.

[CR Note: or just C&D loans for Construction & Development]

"Everyone in the media is focused on consumer foreclosures," said Ivy Zelman, a housing analyst at Zelman & Associates. "What they're not focused on is the builder-developer foreclosures, which are only in the early innings and which will continue to wreak havoc as these assets are liquidated at depressed prices. Until they are cleared, there can't be a stabilization in home prices."

Zelman thinks the pressure will cause "hundreds of banks" to close.
...
Of particular concern is that ADC loans are concentrated in smaller banks, which tend to have deep ties to local developers. ADC loans account for 47 percent of nonperforming loans at small banks, compared with 14 percent at larger banks.

This really isn't a new topic - the FDIC issued a report on emerging risks in 2006 that clearly showed that medium sized institutions ($1-$10 billion in assets) had excessive exposure to C&D loans. And it is really the mid-sized institutions, not the smaller institutions (although plenty of those will fail too because of bad C&D loans).

Here are three key graphs concerning C&D loans based on the FDIC Q4 Quarterly Banking Profile:

Click on graph for larger image in new window.

The first graph shows the number of FDIC insured institutions with construction loans exceeding total capital.

Not all of these institutions will fail, and not all failures will be because of C&D loans, but this gives an idea of the number of institutions with excessive exposure to C&D loans.

The second graph shows the concentration of C&D loans by institution asset size.

This suggests that a higher percentage of mid-sized banks ($1 to $10 billion range) will fail from C&D losses. There were two examples this year: County Bank, Merced, California had $1.7 billion in assets. Alliance Bank, Culver City, CA had $1.14 billion in assets. Both were seized by the FDIC on February 6th.

Of course there are many more small banks. The FDIC Q4 report shows 7,629 institutions under $1 billion in assets, 562 mid-sized institutions, and only 114 with greater than $10 billion in assets. So most of the failures will be smaller banks.

The third graph shows the noncurrent rate for C&D loans. The rate is rising quickly - hitting 8.5% in Q4 - although the rate is still below the level of the early '90s (related to overbuilding of CRE and the S&L crisis).

Put together, these graphs suggest many more bank failures as the C&D noncurrent rate continues to rise. Other banks will fail because of bad residential loans (like IndyMac), and some institutions from bad CRE loans, but most bank failures will probably be C&D related.

by Calculated Risk on 3/11/2009 10:51:00 AM

From Brad Setser: The fall in China’s exports caught up with the fall in China’s imports, at least for now

After soaring for most of this decade — the pace of China’s export growth clearly turned up in 2002 or 2003 and then stayed at a very high pace — China’s exports are falling back to earth. The surge in China’s exports could prove to be as unsustainable as the rise in US (and some European) home prices. They might end up being mirror images … as Americans and Europeans could only import so much from China so long as they could borrow against rising home prices.
emphasis added

credit: graph from Brad Setser

Historically there has been a strong correlation between household mortgage equity withdrawal (MEW) in the U.S. and the U.S. trade deficit. Now that MEW is essentially over, the U.S. trade deficit has declined sharply too.

As Setser suggests, the surge in China's exports were very dependent on the U.S. and European housing bubbles - and MEW.

Note: Q4 MEW will probably be available next week (the Fed's Flow of Funds report will be released tomorrow).

by Calculated Risk on 3/11/2009 09:13:00 AM

From The Times: Bank to begin 'printing money' to boost economy

The Bank of England will start pumping newly created money into the economy today by buying £2 billion in gilts as it embarks on "quantitative easing" in an effort to boost the economy.
...
Mervyn King, the Governor of the Bank, indicated last week that the Bank would continue this course of action until the lending markets became unglued.

... the Bank's announcement has already had some effects.

Benchmark ten-year bond yields fell to a record low of 2.95 per cent at the beginning of the week and sterling swap rates, used by banks and building societies to calculate fixed-term mortgage rates, have also dropped, indicating that lenders should be able to offer more competitive home loan rates.

Corporate borrowing costs have also fallen by between 0.44 and 0.72 percentage points, according to the sterling iBoxx index.

The Fed will probably watch this closely as they discuss buying long-term treasuries at the Fed meeting next week.

by Calculated Risk on 3/11/2009 01:49:00 AM

Link: A conversation with Timothy Geithner

Stress test / public-private discussion starts at just after 6 minutes ...