Tuesday, February 28, 2012
Durables Somewhat Perturbing
What bothers me about this report is the implication that inventories are beginning to pile up. Still, it may be okay - but this is the report to watch for the next few months. It looks like we are close to the edge in transportation, and that definitely needs watching. Both the monthly drop in new orders (-4.0%) and the monthly build in inventories (+0.7%) are large for this report. Then you look at the rail figures and start to wonder....
Inventories had reached the sensitive point, but seemed to have been correcting by themselves. They are high enough that one must be alert to relatively small changes in final demand. This graph only goes through December!!!
The relatively big drop in both shipments and new orders for primary metals is not the most favorable sign.
The seasonally-adjusted inventories graph looked a bit rougher all along:
When the final January numbers are out, these graphs will look worse. The international decline in growth trajectory does not help US manufacturers.
US real disposable per capita incomes (after-tax) are not going the right way, so there's a potential issue here - US demand is not likely to take up any international slack:
Utility figures don't lie!
Industrial production for non-durable consumer goods has followed real disposable per-capita incomes much more closely:
My entire skipping recession rests on the theory that we won't have a cosmic alignment; right now that theory looks a tad questionable. You have to think gas prices push most consumers closer to the edge even with easy money.
We know the easy-money thang will continue, so....
The only really favorable thing I can hang my hat on are bank deposits, because they are growing again. But looking at small domestic charters makes me dubious:
You have to open this up and look at it. The unified deposits/loans and leases spike is almost certainly draws on credit lines putting cash in bank deposits to cover tax bills.
Overall it appears that people finally caught up with themselves on the credit/cash ratios, but now we wait to see what happens. Falling incomes and higher expenses tend to increase conservative behaviors.
A lot of the fall in loans was write-offs, so don't get too exuberant. The epic gap between funding deposits and floated credit has finally shifted positively and should be considered a resilience factor right now for the US economy.
You can see some of the spike in All Domestic Banks (here we are using total deposits because other deposits wasn't reported until recently):
If you open this up you can see a bit of the spike in loans, but the spike in deposits is obvious.
Deposits tend to rise relatively rapidly before a recession, so this is not necessarily good news.
This accounting rule will start causing the commercial real estate market severe indigestion. Along with Sears and the Post Office closing many locations. This article explains why suddenly we saw no commercial real estate problems and now we will. (I apologize for the language):
“Why the sudden surge in distressed properties coming to market in late 2011? It seems the FASB finally decided to grow a pair of balls after being neutered by Bernanke and Geithner in 2009 regarding mark to market accounting. They issued an Accounting Standards Update (ASU) that went into effect for all periods after June 15, 2011called Clarifications to Accounting for Troubled Debt Restructurings by Creditors. Essentially, if a lender is involved in a troubled debt restructuring with a debtor, including a forbearance agreement or a workout, the property MUST be marked to market. Andy Miller understands this is the beginning of the end for “extend and pretend”:”
The entire article is an important one.
So see OCC's guidance on banking accounting. I believe the relevant portion starts around page 29.
Now, there is absolutely no rule that will allow you to evaluate an impaired loan on a mythical collateral value. At a minimum that throws you into FAS 114, and I quote:
When a loan is impaired as defined in paragraph 8 of this Statement, a creditor shall
measure impairment based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a creditor may measure
impairment based on a loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Regardless of the measurement method, a creditor shall measure
impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. The creditor may choose a measurement method on a loan-by-loan basis. A creditor shall consider estimated costs to sell, on a discounted basis, in the measure of impairment if those costs are expected to reduce the cash flows available to repay or otherwise satisfy the loan. If the measure of the impaired loan is less than the recorded investment in the loan 2 (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount), a creditor shall recognize an impairment by creating a valuation allowance with a corresponding charge to bad-debt expense or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to bad-debt expense.
The examiners do review these and they will gut you and hang your body in front of the bank door as a warning to other passing bankers if you fudge. So I don't think Zero Hedge knows jack about bank accounting.
Suppose you did a TDR and the loan then performed for six months. You then generally can put the loan back into accrual status, at which you can start recognizing interest. However a recorded loss has to be taken to account for the lesser value of the loans cash flows. You will already have calculated that and charged that loss off. If the modified loan does not perform, now you are going to evaluate on the basis of foreclosure.
If you also have a second lien or an HE or in some cases a multi-collateralized loan secured in part by the property securing the original mortgage, you also use FAS 5 to adjust those loan values. (There is one evaluation of recovery generally - but that evaluation will be used to evaluate losses on these other loans.
Then there is also FAS 65. FAS 114 is usually applied to portfolio loans. FAS 65 applies to mortgage banking operations, including the valuation of servicing rights.
The whole mark-to-market bit really had to do with SECURITIES, not individual loans. And the reason CRE is an issue now is that those loans are rolling into their next period (out of the initial financing), and that triggers a lot of payments and sudden disclosures,
Loans bought as a ppol for the portfolio are evaluated with pool accounting. In 2010 the rules were tightened for banks. Up until then, a troubled loan could be "pulled" from the pool and go through the entire impairment process. That option was removed, because it tended to allow banks to pretend that the rest of the pool was unchanged, whereas if you treat the pool as a whole, you have to account for expected losses in the rest of the pool if 10 out 100 loans are now impaired.
Accounting for securities is more complicated. If there is no market valuation available, your options get slim.
FAS 114 was issued in the 90s.
Zero Hedge is commenting on this.
If you will read through it, you will note that among the assets specifically EXCLUDED are pooled loans.
If you read the last link, it gives examples on commercial loans.
The real focus of this rule has to do with not allowing loan rolling to recognize the impairment. This is especially important for balloon loans, which many CRE loans are. Here the idea is that if you refinanced at a below-market rate, taking into account all of the creditor's characteristics, you may not then class the loan as "whole", instead you have to evaluate the degree of impairment.
That update also blocked the effective-interest rate escape clause, especially in cases in which repayment of the debt is collateral dependent (very important in CRE) and the value of the collateral has dropped.
As of the last industrial production report, output was down 7.5% over the year, and capacity utilization was at 74.6% - well below the 2009 low, and far below the 1990-91 low, both of which were in the lower 80 ranges.
Growth in manufacturing ought to be ramping this up a bit. You saw the blip in November (MoM up 0.1%), which was holiday lighting. It's clearly residential.
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