Monday, December 31, 2007
Happy New Year!
The Evil At The Heart Of Verizon
I rigged up a little robot to test it every five minutes, and I'm going to start to run it tomorrow. If it's not fixed, I AM going to sue.
The phone has been intermittently out since December 7th. Do you know what it's like to have someone with a heart condition and no phone service? Do you know what it's like to try to make doctor's appointments with no phone service? I am so stressed out that it's unbelievable.
After the phone had been intermittently out for two weeks (it mostly was out during the daytime), Verizon still refused to come out and look at the lines unless I could give them a cell phone number. This must be illegal. They didn't even need to come in the house - the problem was the line, as I told them it was. It's not like I hadn't checked everything on this end in multiple ways.
This is a company that is cruising for a major bruising.
My brother got me two cell phones. (I didn't dare leave the Chief alone long enough to go get them myself. If he had had a heart attack, he couldn't even have dialed 911!)
My brother picked the cell phones up on the 22nd. It was the 27th before we got Verizon to activate both of them. There was another problem, which they could not fix. Eventually I got to the point at which I had spent over an hour on the phone with the store where he got them, and they finally told me to call the Verizon help number. When I waded through that rigmarole, it told me to call back on a land line. My brother took them back to the store. Finally they said they had them fixed. He brought them back to me. One phone still did not work.
They really are that bad.
So let me reiterate:
- Verizon would not even come out to the house to fix the land line unless I could give them a cell number, not that they needed to come in the house. (They also made and did not keep two repair appointments).
- When I got a damned Verizon cell phone, they told me the problem with the cell phone couldn't be fixed unless I called on a land line.
Jerks. Fools. Never f@ck with a programmer's spouse's life. NEVER.
By the way, this is in the Northeast. I stuffed the Chief and the two dogs into the car and started driving December 2nd, because I could see things weren't going well. The ruralish part of GA where I live has been badly hit by GA's attempts at providing more health coverage. So many people are covered under government plans with laughable reimbursement rates that most of the good doctors have left their practices. The hospitals are death traps. The locals won't even go to one of them, because they know their chances of getting out alive are not good.
The future of socialized medicine in the States can already be seen in a few southern states, and it is not pretty. You have to get enough money into the system to keep the doctors and health facilities in service, with decent nurses, or insurance does you no good at all. Sure, you won't get a bill - but you will be dead or crippled.
My epic battle to keep the Chief from becoming dead or crippled continues. During this interval I got viral pneumonia. It's not surprising.
I wish to proudly report that I never ever swore at any of the Verizon people. I never even yelled at them, although I did become firm and strident with the last support dingbat with who I was speaking. I think this is an accomplishment that should win worldwide reknown.
Saturday, December 29, 2007
Calvin And Hobbes
My refrigerator gave out this week - just when it suddenly warmed up (I dragged the Chief to an unknown secluded northern locale from which he cannot escape in order to ensure he would actually attend his medical appointments.) Anyway, ice is on my mind.
Friday, December 28, 2007
See Calculated Risk for more, and here is a Bloomberg article quoting gloomy stats such as:
November sales were the weakest since April 1995.SA months of supply was 9.3, and NSA months of supply came in at 11.1. Neither forecast much of an environment for price increases, but they do strongly support the expectation that prices will continue to drop. The revisions to the New Home Sales report have been consistently downward for months, and so one would expect the same for this month's numbers. October's sales have already been revised from 728,000 down to 711,000, and will go lower still. The big change in this report is that generally each month's sales are reported as an improvement (only to be revised down later), and this month's report did not show that month-to-month improvement. The inventory figures on this report are also now useless because sales cancellations are not recorded, and cancellation rates have skyrocketed. So it is likely that real months of supply is higher - probably over one year's worth.
Sales of new homes were down 34 percent from the same time last year, the biggest 12-month drop since January 1991.
Needless to say, housing starts should continue to dwindle. One note here - as I predicted much earlier, real prime mortgage rates have dropped very low indeed. Those low rates plus declining prices and excellent negotiation power should be an incentive to buy for real prime buyers. Therefore I expected this report to be a little better than it was, and I am surprised. It may be revised slightly upward.
There are not enough real prime buyers (20% down, excellent credit) to stem the RE slide for at least a year more.
NAR's existing home sales report was released, and it contains sales through October. Extrapolating from existing sales, it does not appear that existing single family sales for 2007 can come in over 5,050,000, and probably will be lower. That compares to existing single family sales for 2004-2006 of 5,958,000, 6,180,000, and 5,677,000.
Condos are doing a little better in previous year comparisons. Extrapolating from sales through October, condo sales for 2007 should be below 740,000. That compares to existing condo sales for 2004-2006 of 820,000, 896,000, and 801,000. Condo sales are juiced by retirement age people who are downsizing or moving to retirement locations, and by affordability in some locations.
Unfortunately, condo months of supply is now at 13.1 months, compared to single family months of supply of 10.5 months. It is difficult to feel good about the market with numbers like that. One factor holding down overall condo supply is that many condo projects are being halted or changed to rental projects. Still, there is a lot more out there in the multi-family pipeline - far more, it appears, than can be absorbed by these sales rates.
With high new home inventory, and sky high existing home inventory, plus the hidden inventory of the cancelled/pulled homes, here's how it looks to me:
2008 new home sales somewhere in the range of 700,000-800,000 (supply approx 720,000)
2008 existing single family sales in the range of 4,650,000-4,750,000 (supply 5,200,000)
2008 existing condo sales in the range of 720,000 - 740,000 (supply 725,000)
The supply figures I provide are adjusted by minimal figures for additional forced sales in the case of existing homes, and by my estimate of cancelled/non-recorded new construction for new homes. Thus it appears that if no new homes were being built, we'd have our supply needs for 2008 already taken care of. Of course other homes will be built, and individuals will die (about 1% of the population at least), and people will transfer, etc. Generally at least 4% of the housing stock turns over every year.
I've written before about the very high vacancy rates for housing, which surely include some other inventory. More accurate figures would put current supply at about 2 million above the figures I have shown here.
So no possible housing recovery until, at the earliest, the very end of 2009, and more probably in about half the country it will be delayed until late 2010 or 2011. Consumer sentiment will be highly negative by 2009, though.
This is an extraordinarily ugly prospect, and it makes me believe that my sales figures above for existing home sales may be too high. As pricing drops, making decent loans becomes much harder, and credit qualifications (including downpayments) have to rise. That forces demand down. I don't think we can look for that much in the way of new household formation to boost demand because of wages and real costs. Most of the FTHB in the built-up areas wouldn't have occurred if credit qualifications had been reasonable over the last few years.
If you look at listing price data, it appears that Case-Shiller's appreciating cities are actually depreciating. Indeed, it appears that cities that had experienced early declines and seemed to be bottoming out have now resumed their downward price trajectory. Case Shiller is excellent data, but it lags and smooths list price changes.
I defy anyone to look at the list price data at Housing Tracker and make a case that a five percent downpayment is enough for most markets. Ten percent would give more security to potential investors. As the lagged reality slowly filters its way into the official data, credit standards must continue to tighten further.
Thursday, December 27, 2007
OMG, They Got Bhutto
A very brave woman is dead. This is a tragedy on so many levels.
I wish some of the people who rant about there being no moderate Muslims would pause for a moment to reflect that there are, and that many of them have shown incredible courage in bucking the trend to speak for reason and hope in their own countries. There are many Muslim martyrs to reason, and to refuse to recognize that is an insult to humanity and reason itself.
UI & The Dawning Light Of Reality
More notable, the SA number for Dec 15th continuing claims was 2,713,000, compared to the previous year's 2,498,000. The NSA total is 2,813,463, compared to the previous year's 2,565,805. Either way, we have reached the significant YoY increase of 200,000 and passed it. The NSA difference is over 245,000. I think we will continue to set new YoY increases in the weeks ahead. A lot of seasonal jobs always drop out anyway at this time, and this year it will hurt more than most years. (To see the trajectory, go to this page and select the option called Weekly Claims data at the bottom right.)
The economic press is about to get interested in this number because initial claims are going to pass 350,000. That may happen when this week's figure is updated next week.
The durable goods report for November was depressing again. After 3 consecutive declines, November new orders finally rose. Inventories rose, and shipments dropped. The October revisions were negative. The YoY comparisons have improved, but that is largely because we are now comparing this year's figures to the prior year with the inclusion of the very weak period at the end of 2006.
I can't emphasize enough that whether we can escape with a somewhat mild recession versus a long, hard recession really depends on how well manufacturing can exploit the weak dollar, which largely depends on how other developed and developing economies can weather the credit crisis.
That is a long cycle - manufacturing orders often have a long lead time. So while this report is not dire (new orders for nondefense aircraft showed a pleasing pop), it is disappointing.
Demand in the US is doomed to be weak from consumers and businesses. With food and fuel pushing services prices up, many consumers are strapped. The impact is going to show up in service businesses around the nation. Commercial real estate is poised to take a real downturn, and building and tenanting commercial real estate (think strip malls and office buildings) drives a big portion of internal demand. It's not just carpeting, and fixtures. It's desks, cabinets, lighting, furniture, computers and POS systems, plus internet/phone, all of which show up in the GDP category called gross private domestic investment. That category drives the rest of the internal economy.
What we have lost for 2008 is a good portion of the retail expansion. That is really going to hurt as it adds to continued drops in residential construction and a pullback in office condos. The financial sector had produced a lot of growth as well, and that is gone. An additional downward vector will be slower growth in state and local government employment and spending - and in the hardest hit areas, outright cutbacks.
If we don't get rising demand from foreign sources, both domestic jobs and investment will take a determined downward plunge in 2008. They are doomed to trickle along the downward slope anyway because of tighter consumer spending. If we throw a broader decline in business spending on top of that, it is going to be UGLY.
Waiting for November preliminary trucking figures. Through October, it looked like this. Note that we continue a string of YoY declines:
We did not manage to get the pre-holiday rise in truck freight we had in 2006, and it will be interesting to see if we get the plunge. We are still looking at YTD YoY declines in rail freight. There was some improvement in November, but it is not clear if that continued into December. There is a high correlation between trucking and rail, so the probability is that truck freight did well in November and tailed off in December, which would forecast poor manufacturing growth.
Wednesday, December 26, 2007
The Day After
But at least I'm not one of these big banks holding crappy CRE and residential mortgage portfolios. Things, I suppose, could have been worse as of Dec 20th:
But not much worse:
The Standard & Poor's/Case-Shiller year-over-year index of 10 metropolitan areas fell to 209.68 in October, a drop of 6.7 percent from a year earlier. The decline surpassed the 6.3 percent drop in April 1991.Now the regionals get hit. If you can afford to ignore it, I would ignore financial news until about Jan 5th or so. US news doesn't really matter that much right now for the long term. What happens in the US economy (aside from the bad stuff we already know about) will be determined by global growth.
The firm's newer, composite home price index on 20 metropolitan areas declined to 192.89 in October, down 6.1 percent from a year ago.
What matters most for global growth will be what happens in Europe, and I sure hope the UK isn't giving us a preview of that:
The UK housing market has become a speculative merry-go-round. There are virtually no first time buyers in the market.That is an ugly description of the situation!
What accounts for the vast majority of home sales these days? People who own property are selling their overpriced properties to other people owning property. The market is now driven by speculators trying to squeeze out capital gains from each other, with transactions being financed by banks.
The statistics on disappearance of first time buyers are shocking:
# Average house prices are unaffordable for first time buyers in 466 out of 483 towns
# In 2007, the average first time buyer in 8 out of 12 UK regions paid stamp duty.
# The number of first time buyers is at its lowest since 1980.
Saturday, December 22, 2007
A Little More Christmassy
We always celebrated Christmas on Christmas Eve as each child made themselves look as beautiful and as handsome as they could. I remember how anxious we were to finish our evening meal and clean up so that the big curtain could be pulled back. Everyone was so excited and as we gathered around the curtain. We began to sing Christmas songs, and then the curtain finally was pulled back. I would have to fight back tears because our bond of togetherness and love was strong during Christmas as we sang such beautiful old songs. I loved looking at the Manger as the social workers would read to us the story again of the miracle of Christ’s birth. Candles were lit on the Christmas tree as the room was dimmed. It was a holy and very reverent moment for all of us.Probably one of the most Christmassy things you'll read this year.
The Anchoress posts Giuliani's Christmas ad. Funny, and it cracks me up that Huckabee's got all that attention. Rudy has something. A verve. He's willing to be himself. I'm not saying that he's my candidate, but it is a relief to see someone willing to mock the whole thing a bit. I think it's such a pity that the primaries have been moved up to the beginning of the year. The candidates shouldn't be stumping now. The voters don't want to hear it - they want to be with their families, and the candidates should be with their families too. These are, after all, not spring chickens. They deserve a rest.
Well, the Magi followed their star, and the Vatican astronomers are going to be moving into better facilities to keep gazing at theirs. I don't know why, but this story struck me as being right in the holiday mood.
Friday, December 21, 2007
Merry Episcopal Feminist Epiphany To You
The caption was:
We don't need no stinkin' patriarchs in TEC!!!! Or any men, for that matter, and that includes you, Joseph. I always thought that Joseph got poor billing in the Holy Family anyway. Without him, what would have happened? Don't tell me that he didn't take a huge amount of abuse over the whole thing, and talk about faith! Mary at least had the Annunciation. All Joseph got was a strange story and someone else's baby, and now I guess he's out of the picture altogether.
No doubt the official TEC creche has no rams standing around. No bulls allowed. For a church that talks so much about inclusiveness, it seems a bit mean to exclude men entirely.
I don't know whether this has anything to do with the fact that 3 or 4 Episcopalian bishops are begging to be let into the Catholic church, but it is hard not to speculate. Perhaps they fear the ritual castration comes next.
Kazakhstan & the Credit Crunch
Western investors pumped $40.7 billion into Kazakhstan, most during the past three years, according to Moody's Investors Service. The money provided the cash for a surge in domestic lending for new homes, cars and other accoutrements of the country's improving fortunes. Now, the foreign money has almost dried up.Yes, but the growth has been achieved with outside investments probably averaging around 10 billion a year for the last few years, or 1/8th GDP. To put it another way, that's 12.5% of GDP, and now that money has dried up. The consequences for Kazakhstan's domestic economy are likely to be quite severe. They might get back 3-4 billion of that.
Kazakhstan banks' sales of Eurobonds and syndicated loans, which totaled $8.63 billion during the first eight months of 2007, fell to $300 million in the following three months, according to data compiled by Bloomberg.
Four times the size of Texas, the central Asian country parodied in the 2006 movie ``Borat'' boasts an $80 billion economy that has grown almost 10 percent a year since 2000.
There are similar situations in many such countries. Note that Kazakhstan's major economic resources at this time are metals, minerals and fuel. These are all commodities which are acutely sensitive to world growth.
My belief is that these lower echelon EM countries are likely to be starved of funds and that growth will be very constricted, which will begin to chip away at global infrastructure improvements. It's a reality that those with money to spend are more likely to invest it in buying cheap shares in the likes of Merrill and Citibank rather than continuing to pump it into the ex Soviet bloc countries.
Poland may be in a similar situation. The next tier of EMs are likely to do better, because they are more developed. Still, the world is shortly going to be in competition for money, and the weaker economies will be elbowed off the trading floor.
And, btw, so will the more reckless financial investments. Understanding the true plight of credit insurers such as MBIA is related to the fact that their revenues are drying up as their expenses increase.
Nominal outlays rose 1.1% in November. In chained 2000 dollars, that's .5%. Nominal personal income rose .2 and .3 in October and November, but in chained 2000 dollars that turns into -.2 and -.3 respectively.
Nonfarm proprietor's income was revised up for October and rose in November:
Proprietors' income increased $7.2 billion in November, compared with an increase of $3.7There were major second quarter downward revisions in personal income recently as a result of changes in wage and job estimates, so one hardly knows what to think. Except, of course, what we already knew - consumers are losing pace against inflation quite rapidly.
billion in October. Farm proprietors' income increased $0.5 billion, compared with an increase of
$0.6 billion. Nonfarm proprietors' income increased $6.7 billion, compared with an increase of $3.1 billion.
Corporate profits were already falling in the third quarter, and the growth in private inventories saved gross private domestic investment from being negative. Now a lot depends on how quickly those inventories are drawn down.
Thursday, December 20, 2007
Brief News Bits
Just to reiterate, the bond insurers cover issues like munis, which should be largely uncorrelated to the mortgage debt. Thus weakness in these companies serves to abruptly correlate the ratings and market prices of many debt issues which would otherwise have only weak linkage. MBIA's announcement is a major blow to the groin for this market. MBIA's book value last quarter now appears to be less than its total exposure to those thar subprimey CDO thingies. Do you feel the analysts' pain now?
Initial unemployment claims came in high. 343,000 is the four week leading average for initial claims, and continuing claims are now over 2,700,000. There has been good seasonal employment in retail in many areas because of expanded hours, and the spate of early retirees should be cutting overall unemployment down. Still, the employment weakness is becoming marked enough to generate uneasiness.
Leading indicators dropped again. I don't pay any attention at all to them, because it seems like it is always addressing a few months ago. My feeling about leading indicators is that they should lead rather than lagging, and the Conference Board's leading indicators are composed of lagging signals. Still, the leading index is down 1.2% from May to November, which should provide considerable cover for the Fed to cut rates again in January. It's looking more like 50 bps than 25.
SunTrust is coughing up 1.4 billion to cover several of its money markets. They say they don't expect to be doing this again. One doubts they could afford to do it again.
Doesn't the SunTrust news make you feel better about Bear Stearns' dinky little 854 million dollar quarterly loss (stemming from 1.9 billion in losses on mortgages)? It is Bear Stearns' first loss in over 80 years, but there's a first time for everything. Management has announced that it feels great shame.
Over 90 banks arrived for the Fed's Oliver Twist line for workout soup. When you find yourself shoring up your money market funds, cash can get a bit tight. Naturally they couldn't all win the auction, and pitiful cries of "Please sir, can I have some more" resounded through the Halls of Finance. That kind avuncular Fed is going to hold another auction. Dickens would be so proud.
I intend to have a good Christmas, and I hope you all will also. The New Year can just take care of itself for the time being.
Wednesday, December 19, 2007
MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, had the outlook on their AAA credit ratings lowered to negative from stable by Standard & Poor's, while ACA Capital Holdings Inc.'s guaranty ranking was cut to CCC from A.The consequences are so severe that it is likely a bailout will be constructed by parties that will take major losses on securities if it doesn't. The reason why they would do so is that by bailing out the company, they will get a stake and a theoretical way to recover some value down the road. But this one's very risky, because ACA can continue to degrade, and it is likely to do so. The alternative is to purchase replacement protection from another outfit, hopefully one that does not go bust next summer (ACA will not be the last). It is now expensive, however.
S&P also reduced its outlook for Financial Guaranty Insurance Co. and XL Capital Assurance Inc. to negative.
ACA Capital is required to post collateral of about $1.7 billion if its credit rating falls below A-, management said during a Nov. 9 conference call. The rating was cut 12 levels today. The New York-based company said Nov. 19 it wouldn't be able to post that much or make termination payments on the contracts.
Bear Stearns Cos. and Merrill Lynch & Co. are among several major banks in talks to bail out ACA, the New York Times reported today, citing two people familiar with the situation.
This one's big. Everyone's known it was coming, but this certainly is like waking up and finding the Grinch lurking in the bare living room. Poor Cindy Lou! Poor Stern Sad Bear! Poor Merry Bull! And yesterday Sacks of Gold announced that some of its domestic gooses seemed to have stopped laying golden eggs, for reasons no one could have foreseen, except maybe Dr. Seuss. The problem with the best and the brightest minds of IB is that they don't spend enough time reading fairy tales.
No one is going to ask the question openly about why companies were buying protection from a shaky company in the first place. But it is the question that is lurking in every investor's heart, and the world of Wall Street is getting more and more like the world of Walt Disney and Dr Seuss.
The really great thing is that it is all going to get so much, much worse on the default side. Who the heck can refinance all those funny money loans if they are supposed to verify income, as the FRB is proposing? I expect the commentary on the proposal will read about like this:
You're a mean one, Mr. Grinch.It will be the S_n_t_rs talking that way too, as the head of FNMA and various major banks call up cursing and awailing foul fate. The S_n_t_rs have had their fun trash-talking the FRB, and now the FRB has struck back. Personally, I like the idea of seeing Chuckie the Duckie Schumer wailing "Yooour soul is fuuuull of guuunk!" into the mike clasped in his death grip. Must be my latent sadism.
You really are a heel.
You're as cuddly as a cactus,
You're as charming as an eel.
You're a bad banana
With a greasy black peel.
You're a monster, Mr. Grinch.
Your heart's an empty hole.
Your brain is full of spiders,
You've got garlic in your soul.
I wouldn't touch you, with a
thirty-nine-and-a-half foot pole.
You're a vile one, Mr. Grinch.
You have termites in your smile.
You have all the tender sweetness
Of a seasick crocodile.
Given the choice between the two of you
I'd take the seasick crockodile.
You're a foul one, Mr. Grinch.
You're a nasty, wasty skunk.
Your heart is full of unwashed socks
Your soul is full of gunk.
The three words that best describe you,
are, and I quote: "Stink. Stank. Stunk."
You're a rotter, Mr. Grinch.
You're the king of sinful sots.
Your heart's a dead tomato splot
With moldy purple spots,
Your soul is an apalling dump heap overflowing
with the most disgraceful assortment of deplorable
Mangled up in tangled up knots.
You nauseate me, Mr. Grinch.
With a nauseaus super-naus.
You're a crooked jerky jockey
And you drive a crooked horse.
You're a three decker saurkraut and toadstool
With arsenic sauce.
Blogging will probably be light, because the Chief is making a desperate attempt to escape from the medical web in which I have brutally enmeshed him. I must stand guard over his live body, or I will find myself standing watch over his corpse.
Tuesday, December 18, 2007
Bailing In Europe
The guarantees will now include all wholesale loans and bonds that are not secured against assets, as well as derivatives trades, the U.K. Treasury said in a statement today. The government will also endorse covered bonds as well as repurchases of mortgages by the bank from its Granite securitization trust.Whoa! This mule is moribund. They are going to have to nationalize it, I guess.
The Treasury said its plan from September to protect retail and wholesale depositors after the first run on a U.K. bank in more than a century ``will remain in place during the current instability in the financial markets.''
In the meantime, the ECB injected a trifling 500 mil into the financial system in Europe. Hey, what's a few Euros among friends?
The cost to borrow in euros through the end of the year plunged after the European Central Bank added an unprecedented $500 billion to the banking system as part of a global effort to ease gridlock in the credit market.So interbank rates dropped 50 bps as a result. Naturally, if other banks go bust the effect will be short. Still, it's a resurrection of sorts. The ECB has thrown way more money at the problem than the US; FT story describes this attempt:
The amount banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45 percent, the European Banking Federation said today. The rate had soared 83 basis points in the past two weeks as banks anticipated a squeeze on credit through year-end.
``These are strong-arm tactics intended to show the market they're seriously committed to breaking the deadlock,'' said Marc Ostwald, a fixed-income strategist at Insinger De Beaufort SA in London. ``The ECB is helping to bankroll banks out of a problem that they themselves created.''
Emergency help for financial markets entered new territory on Monday night as the European Central Bank announced it would on Tuesday offer unlimited funds at below market interest rates in a special operation to head off a year-end liquidity crisis.Yeah, yeah, yeah. I doubt very much GS has adjusted its own balance sheets to the new reality either. The bottom line is that GS traders have a big stake in the big bear market, and they need a little help from their friends to get there.
The surprise move, which follows last week's co-ordinated barrage of measures by the world's central banks to increase market liquidity, suggests the ECB is still frustrated at the failure to ease market tensions.
The measure was reminiscent of the ECB's operation on August 9, at the start of the global credit squeeze. But that was for overnight loans while the new offer is for two weeks.
Analysts warned that the measure risked increasing market volatility and saw the central bank breaking new ground in helping out the banking sector.
"This is basically Father Christmas to those who have access," said Erik Nielsen, economist at Goldman Sachs. "They are bailing out people who have not really adjusted their balance sheets to the new reality."
Another big question is what about the other two UK banks at risk? I won't name them, but Northern Rock is not the only stinking fish in the barrel.
In the US, the OTS woke up and is changing its ratings system for savings and loan holding companies to concentrate just a wee bit more on their total risk exposures. Imagine this:
Within the Organizational Structure component, examiners will assess inherent risk in the context of lines of business, operations, affiliate relationships, concentrations, and other exposures.Hmmm. I'm sure this has nothing at all to do with my vision of the flashing initials CW and WM.
Historically, OTS has based the rating of the holding company enterprise on its effect on its subsidiary thrift. OTS has encountered situations where it has supervisory concerns within the holding company enterprise, which did not have a direct impact on the thrift. OTS believes that using the effect on the thrift subsidiary as a SLHC rating criterion can lead to misinterpretation of the rating.
For those who know how to read them, there is considerable understated humor and drama in the grave releases put out by the regulatory agencies. For instance, there must be a saga behind this little mash note from the FRB:
The purpose of this letter is to clarify the Federal Reserve’s expectations regarding confidentiality provisions in agreements between a banking organization and its counterparties (for example, mutual funds, hedge funds, and other trading counterparties) or other third parties. It is contrary to Federal Reserve regulation and policy for agreements to contain confidentiality provisions that (1) restrict the banking organization from providing information to Federal Reserve supervisory staff;1 (2) require or permit, without the prior approval of the Federal Reserve, the banking organization to disclose to a counterparty that any information will be or was provided to Federal Reserve supervisory staff; or (3) require or permit, without the prior approval of the Federal Reserve, the banking organization to inform a counterparty of a current or upcoming Federal Reserve examination or any nonpublic Federal Reserve supervisory initiative or action. Banking organizations that have entered into agreements containing such confidentiality provisions are subject to legal risk.I burst out laughing when I read this one. I have a suspicion on the originating parties, but no proof. Think "insider trading".
Yet another credit union has gone bad. This one is only being placed in conservatorship:
The State of Colorado has assumed control of the operations of Zion United Community Credit Union, a state-chartered, federally insured credit union serving residents in Denver, Colorado.National City filed a love note of its own with the SEC yesterday. Housing Wire has the story and so does CR. The bottom line is that their commercial loans are entering the containment zone.
Monday, December 17, 2007
Will We Ever Escape The BS Zone?
The reality is that we have inflation for basic commodities, and the central banks can only control that inflation by inducing a major global recession. But they can't do that, because the combination of a major global recession combined with all this bad credit would create a global depression. So what they are really trying to do is allow a mild recession to prevent commodity inflation from diffusing throughout the global economy.
Whether this is possible or not remains to be seen. The only way to prevent the diffusion of higher costs is to suppress wages, thus suppressing consumer demand, which will inevitably suppress commercial demand. Naturally enough, suppressing wages is going to cause commercial and consumer credit to go blooey in higher amounts, which will create the risk of an even more severe credit contraction, which will accentuate a mild recession. To prevent a severe credit contraction, the central banks are throwing money into the financial system in a desperate manner. Auctioning money to the highest bidder is just as likely to feed further bad lending as it is to feed responsible investments, and this is what we cannot afford.
It probably would be more efficient to provide some government guarantees underpinning bank lending, because the other side of this story is that the central banks also desperately need the global financial system to slowly back away from the insane credit it has been offering. If there were some penalty for bad lending, but a limited amount of penalty, it would enhance the rewards for due diligence and controlling risk.
All of this talk about possible inflation and possible credit contractions ignores the reality that this is already happening. Take, for example, these two Bloomberg articles. The first discusses the situation in Italy:
Dressed in his best Sunday suit, Fausto Cepponi took his wife and seven-year-old son out for dinner -- at a soup kitchen.In other words, the socialist economies of Europe are facing exactly the same problems that the US economy is facing. Greenspan's addled talk about "virtuous cycles" has led to this - worldwide, workers are in trouble. Kuwaiti foreign workers, Chinese shoemakers, Indonesian petty bureaucrats, Indian farmers and US mechanics all have the same problem. They can't make ends meet.
With salaries on hold, prices for staples such as pasta and bread rising and mortgages soaring, efforts to keep up appearances -- ``fare la bella figura'' in Italian -- can no longer disguise that thousands of job-holding Italians are failing to make ends meet. They've been labeled ``The New Poor,'' the title of a book published this year.
Prime Minister Romano Prodi attempted to address the issue in September by issuing a decree that 12.5 million of the poorest Italians, 21 percent of the population, will receive 150 euros ($220) next December, the single biggest expense in the 2008 budget. Bank of Italy Governor Mario Draghi on Oct. 10 dismissed the payment as ``a short-term fix,'' and said the spread of poverty was holding back Italy's economy.
In a large part, both the growth and collapse of consumer credit is related to this problem. This article discusses the stagflation risks, noting:
China and other emerging markets are trying to slow their economies to keep inflation in check by tightening monetary policy. They've had limited success, in part because some of them have tied their currencies -- directly or indirectly -- to the dollar or the euro.Yes, it has. What has happened is that as the US cuts (or the UK - the pound is keeping pace with the dollar now), these countries experience our inflation. They can either choose to keep a strong currency, control inflation and undercut their exports, or choose a weak currency and experience high inflation.
That restricts their ability to raise interest rates to slow growth because it would probably also lead to an unwanted appreciation of their currencies.
``Global inflation pressures emanate mainly in the emerging countries, where growth is strong and monetary policy is relatively expansionary,'' Fels of Morgan Stanley says.
The same emerging-market nations have also helped stoke inflation by sheltering their consumers and companies from rising oil prices through subsidies. That's kept energy demand in China, India and other countries high because domestic prices are still low.
Now that inflation is accelerating rapidly, the emerging market countries will be the worst affected. If they give their workers raises, they lose the ability to compete, and if they don't, they create serious political instability. These countries are dependent on consumption in other countries to keep their expansions going, so the money is going to leave these markets and roll back to the developed countries such as the US. It's already beginning, and it will continue because many of these countries are unstable politically, and in an environment such as this, big money flies to places in which the owners stand the best chance of retrieving it.
Another problem for these countries is that their internal lending to consumers is breaking down. How anyone could write a long article entitled The Ugly Side of Microlending and omit to mention that rising costs for food and fuel are destroying the ability of consumers in countries like Indonesia and Mexico to repay these loans is completely beyond me. But BusinessWeek managed it, and as I read the story and the comments I realized that very few are confronting the fundamental problem. We are still living in the BS zone that constitutes my real concern about Greenspan's policies.
An economic cycle that consistently cuts the effective wages of the majority of workers in developed countries is anything but virtuous. Inevitably it becomes a problem for the workers in the developing countries, and inevitably it shows up in the world financial system, and shortly thereafter, it induces political instability across the globe. It was not a virtuous cycle. It began as one, and then continued to become a vicious cycle. Paybacks are a bitch.
Ninety percent of what we must face is unavoidable, because we must unwind the imbalances in the world economy. This is the major issue for foreign policy, the major issue for energy policy, and the major issue for economic policy.
The first and most fundamental need is to drop the Kyoto/anti-nuclear nonsense and have the developed countries push hard into nuclear power and whatever else they can use. Coal is fine too. The key to controlling inflation is to control energy costs, and you can only control energy costs by making more energy available. If we don't control energy costs, the debt problem is going to be unmanageable, the pain felt by the bulk of the populations in the emerging countries will be unbearable, and WWIII will erupt.
It's painful to watch the Democratic presidential nomination race and realize how out of touch the primary candidates are. If we get a populist who has a clue, it's going to have to come from the Republican side. Since the top Republican candidates are also in lala land, 2008 is going to be a wild political roll of the dice. The people of the US know what the problem is, but our political structures don't.
Wednesday, December 12, 2007
Fed On Liquidity
Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets.
Federal Reserve Actions
Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee).
Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window. All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions. All advances must be fully collateralized. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.
Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). The first TAF auction of $20 billion is scheduled for Monday, December 17, with settlement on Thursday, December 20; this auction will provide 28-day term funds, maturing Thursday, January 17, 2008. The second auction of up to $20 billion is scheduled for Thursday, December 20, with settlement on Thursday, December 27; this auction will provide 35-day funds, maturing Thursday, January 31, 2008. The third and fourth auctions will be held on January 14 and 28, with settlement on the following Thursdays. The amounts of those auctions will be determined in January. The Federal Reserve may conduct additional auctions in subsequent months, depending in part on evolving market conditions.
Depositories will submit bids through their local Reserve Banks. The minimum bid rate for the auctions will be established at the overnight indexed swap (OIS) rate corresponding to the maturity of the credit being auctioned. The OIS rate is a measure of market participants’ expected average federal funds rate over the relevant term. The minimum rate for the December 17 auction along with other auction details will be announced on Friday, December 14. Noncompetitive tenders may be accepted beginning with the third auction. The results of the first auction will be announced at 10 a.m. Eastern Time on December 19. The schedule for releasing the results of later auctions will be determined subsequently. Detailed terms of the auction and summary auction results will be available at http://www.federalreserve.gov/monetarypolicy/taf.htm.
Experience gained under this temporary program will be helpful in assessing the potential usefulness of augmenting the Federal Reserve’s current monetary policy tools--open market operations and the primary credit facility--with a permanent facility for auctioning term discount window credit. The Board anticipates that it would seek public comment on any proposal for a permanent term auction facility.
The Federal Open Market Committee has authorized temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will provide dollars in amounts of up to $20 billion and $4 billion to the ECB and the SNB, respectively, for use in their jurisdictions. The FOMC approved these swap lines for a period of up to six months.
Information on Related Actions Being Taken by Other Central Banks
Information on the actions that will be taken by other central banks is available at the following websites.
Monday, December 10, 2007
How Bad It Really Is
The spread tells the story. It's worse overseas, btw. Read it and grow sober.
More later if time permits. The ECB needs to cut rates and cut 'em fast.
Friday, December 07, 2007
By Popular Request
Pretty Good Employment
This employment report shows a marked difference between the household survey, which showed 696,000 more persons working, and the establishment survey, which showed 94,000 more jobs. You could claim that the difference in dates caused the discrepancy, but I am going with ADP's very positive report and claiming that employment is picking up some other places in the economy. So sue me if I'm wrong.
The reason I believe so is that the county sample started showing improvements in some manufacturing heavy counties in the summer, the ADP number, a pickup in carload rail freight in November, reasonably good clearing of the continuing claims number, and the fact that there was a turn around in primary and fabricated metals for November. The weaker dollar is starting to show up in my opinion - and in Dryfly's (see comments). The likely difference between the ADP number and the establishment number is that different establishments are sampled!
No, this doesn't change my belief that there is a recession in progress or beginning, but it does provide a helpful hint that the shift of capital from consumption to production is beginning to bear fruit. Building houses does provide jobs, but building houses no one can buy when there's an oversupply in many areas isn't good for the economy. Capital shifting to production will eventually produce a much healthier economy. This shift is not good news for many European countries or for most Asian countries.
The central banks of Canada and the UK have cut their rates by a quarter. The Eurozone is still sitting on the fence screaming about the weak dollar. It's not destined to get much stronger!
November retail sales were lackluster at the larger chain stores except for Costco, which posted a blistering 9% rise. Walmart and Target didn't do well at all. So the same factors that were controlling the economy still are - declining real wages for the bottom half at least. We have a long way to go to climb out of this hole.
See Tanta's post at CR for a fair assessment of the subprime bailout plan. All I can say about it is that it won't make much difference. Those loans basically split between people who are only marginally subprime and can get refinancing, in which case the plan doesn't affect their futures, and those who have loans they can't carry, in which case a freeze won't do much. The intermediate group is relatively small, to be honest, and most of the subprime loans which have defaulted did so before reset.
The MBA report on delinquencies and foreclosures shows the ever-increasing trend, and unfortunately it will be quite a while before this trend has a chance of improving. They provide helpful chart showing the percent of prime and subprime fixed and ARM loans as a percent of population and as a percent of foreclosures. Both subprime and prime ARM loans are defaulting at much higher rates than their fixed counterparts. Prime ARMs, for example, are 14.5% of the total loans and have produced 18.7% of foreclosures.
I think many have jumped to the idea that the ARM resets are producing the foreclosures, but in the actual pools I've seen, that's not true. These loans are largely defaulting before reset, and the reason why they are defaulting is that borrowers who choose ARM loans needed the lower rate because they were stretching to buy or refi. The primary problem seems to be borrowers who have high DTIs (debt to income ratios). Since these borrowers have available credit, they tend to go for several years racking up the CC bills to meet their mortgage, and then they inevitably tip over into default unless they can cashout refi and pay off their other debts, or sell. Prime ARM foreclosure starts were 1.02% compared to subprime fixed foreclosure starts at 1.38%. Those numbers tell the story - it is not the subprime/prime (FICO) difference that is significant in driving the trend. It is debt-to-income ratios. The prime ARM foreclosure start rate more than tripled over the course of the year - the worst relative performance of all categories.
As current conditions wear on, we will see this penetrate more and more into the prime universe of recent borrowers. The traditional exit for prime loans has been into subprime loans, and that door is closing rapidly. Falling home values and weak economic conditions cause a much higher rate of delinquencies and foreclosures.
The delinquency rate for prime loans (delinquency rates don't include foreclosures) is now a staggering 3.12%. True, this is better than the 16.31% for subprime loans, or the 12.92% for FHA loans, or the 6.58% for VA loans. But prime loans are a much higher percentage of all loans (over 77%), and as these loans go bad in higher numbers, the overall portion of delinquencies and foreclosures is doomed to keep rising. 5.59% of all loans are delinquent. 1.69% of all loans are in foreclosure. .78% (approximately 3/4 of 1 percent) of all loans are entering foreclosure, which is up .13% from the second quarter. Consider that last a quarterly rate, and the picture is bleak. How bleak? THESE ARE ALREADY THE HIGHEST FORECLOSURE RATES EVER RECORDED, and all traditional metrics suggest that foreclosure rates will climb for several more years.
For the economy as a whole, the situation is that consumer consumption will continue to drop for some time. And by the way, it's quite impossible for the American economy to avoid a recession while having a housing depression and a consumer recession. I do not believe that overall MEW will drop that much, but the difference is that far more of it will come from older folks who are mortgaging their homes to pay for basic necessities. That's the reality of the faked CPI inflation numbers - older people are losing the economic race at an ever-increasing rate. So relatively little of the new breed of MEW will go into retail (except for groceries and pharmaceuticals).
As for this blog, posts are destined to be sporadic because of my personal situation. The Chief is ill and time is taken up with medical stuff. It's serious. I'm freaking. It's been a terrible year for me personally. I console myself with the undoubted reality that my entire adult life has been an objective disaster which has subjectively worked out well, but this is a test of character I will probably fail.
Tuesday, December 04, 2007
There was a big rise in bankruptcies in the last month. 5.9 for services, and a shocking 7.8 for manufacturing.
The seasonally adjusted Credit Manager’s Index (CMI) fell for the third consecutive month in November, losing 0.7% as both service and manufacturing sector indexes declined. Although the drop was relatively small, all six unfavorable factors components fell, leaving five below the 50 level, indicating economic contraction. “This is the first time that there has ever been more than four components indicating contraction since the inception of the CMI in 2002, and it could well be a harbinger of things to come,” said Daniel North, chief economist with credit insurer Euler Hermes ACI.Because NACM CMI basically measures interbusiness credit, it is a good indicator of how much damage the "real economy" is taking.
ISM Manufacturing wasn't that hot either. The PMI was 50.8. New orders are good and exports are growing, but employment dropped from 52 to 47.8 in one month. Inventories dropped, so we'd expect some better performance in the months to come. But prices moved from 63 to 67.5, which is a pretty strong indication that inflation will rise or profit margins will decline.
It looks as if manufacturing will need continued growth in overseas orders, but the worry is that other economies the US sells to will be sliding down the same slope. Bloomberg:
The European Commission, the EU's executive agency, last month forecast a 2.2 percent expansion next year, down from estimated growth of 2.6 percent this year. Since then, a measure of European services expansion fell to the lowest in two years in November, while executive and consumer sentiment dropped to a 20- month low.In the meantime, you can follow the slowly snowballing story of government pools that invested in bad paper at Calculated Risk. There will be a lot of these stories coming out as the ratings continue to be cut, and losses must be recognized. This morning we read that Florida's pension fund took a little fling with the same sort of paper that caused the freeze in the municipal money market fund:
Factory-gate prices increased 3.3 percent from a year earlier, the most since December 2006, after rising 2.7 percent in September, the EU statistics office in Luxembourg said today. The rate exceeded the 3 percent median forecast in a survey of 29 economists by Bloomberg News.
``With the present information our forecast would have lower figures for growth,'' Almunia said. ``We are facing downside risks for our growth scenario.''
The State Board of Administration, manager of $37 billion in short-term assets, including the pool, also oversees the $138 billion Florida Retirement System. The board purchased $3.3 billion of debt whose top ratings were reduced following the collapse of the subprime mortgage market, according to documents obtained by Bloomberg News through an open records request.It's less than one percent of the pension fund, although one wonders what else in there will be downgraded.
Like the hundreds of school districts and towns unable to access $14 billion frozen in the Local Government Investment Pool, Florida's 1.1 million current and retired state workers rely on the board's management to boost returns on the funds that pay their pensions. That has left them vulnerable to the same potential for losses. A state-created home insurer and the treasury are also at risk.