Empiric Student Property Share Discussion Threads

[briarberry] 05/5/2009 11:40

E. James Welsh

Perspective – A way of regarding facts and judging their relative importance.

There are a number of data series that evaluate economic conditions using a diffusion index. A diffusion index will have a value above 50, when a plurality of respondents are positive, and below 50 when a majority are negative. If a diffusion index increases from 35 to 38, it represents a gain of 8.6%, while a rise to 46 from 45 is only a gain of 2.2%. It is natural to think of the larger percentage gain to be more noteworthy. However, the smaller gain is actually more significant, since it will only require a small further improvement, before actual economic growth is achieved. In recent weeks, many economists and market strategists have heralded the end of the recession and the arrival of spring, after spotting a few 'green shoots' of improvement. In most cases, the 'green shoot' was a modest up tick, from a multi-decade low! For instance, the Conference Board's Consumer Confidence Index edged up to 26.0 in March, from 25.3 in February, the lowest reading since records began in 1967.

In February, new home sales were up 4.7% to 337,000, and after that robust increase, were only down 75.7% from their July 2005 peak. In the last three years, housing starts have plunged from 1,823,000 to 358,000, or 80.4%. At the February sales rate, it will take 12.2 months to clear the inventory of new homes for sale, versus 5 months in a healthy market. In the past year, the median price of a new home has fallen from $251,000 to $200,900, a drop of 20%. After retail sales collapsed in the fourth quarter, the inventory-to-sales ratio soared from 1.25 to 1.45, or 16%. Companies were forced to cut production drastically in the first quarter, so bloated inventories could be whittled down. Although the ratio dipped to 1.43 in February, production levels will remain low, until the ratio falls further. The large decline in production will contribute to a fairly weak first quarter, and depress second quarter GDP too.

As noted last month, there is a good chance that GDP will post a positive print in the fourth quarter of this year, and maybe in the third quarter. Most of the 'gain' will be statistical nonsense, but that won't deter most economists from getting excited. In the last 2 years, the 80% plunge in housing starts has subtracted about .9% from GDP each quarter. If housing starts stabilize near February's level in coming months, the .9% hit to GDP will become 0%. If inventories are brought down by the fourth quarter and are in line with sales, the decline of 1% to 2% to GDP from production cuts in the first and second quarter could also improve to 0%. In the fourth quarter last year, personal consumption fell an extraordinary -2.99%, as consumers turned into Grinches.

But consumer spending improved in the first quarter, as government income transfers of $127 billion offset the decline in wages and salaries of $89 billion. In the second quarter, social security recipients will receive a onetime $250 payment in May. Tax refunds are up 11% from last year, and the decline in gasoline prices is also providing a boost to incomes. Consumers will use the extra disposable income to pay down debt, and increase savings and spending. All of these factors should help swing personal consumption to a positive for GDP in coming quarters.

In the second quarter of 2008, GDP grew 2.8%, which is a respectable number. Despite this growth, job losses continued each month, and a self sustaining economic expansion failed to take hold. The most important issue in the next 12 to 15 months is whether the rebound in the second half of 2009 and first half of 2010 will gain enough traction to launch a self sustaining economic recovery. There are many reasons why I remain skeptical.

In the first three months of 2009, more than 2 million jobs were lost, causing the unemployment rate to jump from 7.6% to 8.5%, the highest since November 1983. The unemployment rate increased in March in 46 states, with California, the world's eighth largest economy, hitting 11.2%, the highest since January 1941.

Underemployment, which combines the unemployed, with involuntary part time workers and discouraged workers, reached 15.6%. As noted in recent months, post World War II recessions have on average caused personal income to fall between 4% and 7%, and this one has further to go. Wages and salaries shrank at a 4% annual rate in the first quarter, and according to Deutsche Bank, payroll-tax withholding receipts collected by the Treasury Department are down 8.2% from a year ago. This suggests that personal income growth will remain weak in coming months, and shave more than $250 billion from total income and future demand. Changes in temporary jobs lead reversals in the overall labor market by 6 to 10 months. In 2007, a continuous decline in temporary jobs and hours worked led me to forecast a decline in jobs in 2008. When non-farm jobs fell in January 2008, most economists were shocked, and the stock market sold off sharply. In March, employers cut 71,700 temporary workers, so any real improvement in job growth is many months away.

Most economists are quick to note that unemployment is a lagging indicator, and they're right. But the magnitude of the job losses shouldn't be dismissed so glibly, given the impact they are having on the banking system. The American Bankers Association reported that 3.22% of consumer loans were delinquent at the end of 2008. That is the highest level since the ABA began tracking overall loan delinquency rates in the mid 1970's. And that was before 2 million jobs were lost in the first quarter.

An average of 5,945 bankruptcy petitions were filed each day in March, up 9% from February and 38% from a year ago. The soaring job losses since last September are certainly behind the increase in bankruptcies.

The surge in job losses are working their way up the income ladder, with an increasing number of middle income and upper middle income workers being affected. This is pushing many of those who previously were considered prime credit risks over the edge. Two-thirds of mortgages in the U.S. are held by the best credit risk, prime borrowers. According to the American Bankers Association, 5.06% of prime borrowers have missed at least one mortgage payment. Since prime borrowers are such a large group, this represents 1.8 million mortgages. Although the delinquency rate for sub prime mortgages is up to 21.9%, it only accounts for 1.2 million mortgages.

In the fourth quarter, a number of states mandated a freeze on foreclosures, and a number of banks, not wanting to be a modern day Mr. Potter during the holidays, voluntarily suspended foreclosures. According to RealtyTrac, foreclosure filings increased to 341,180 in March, up 17% from February, and up 46% from a year ago. After the foreclosure moratorium expired in California, notices of trustee sales, which precede foreclosure sales, climbed more than 80% to 33,178 in March from February. Moody's Economy.com estimates more than 2.1 million homes will be lost this year, up from 1.7 in 2008.

Existing home sales have declined 33.3% since peaking in September 2005. The median price has dropped 28.7%, after peaking in July 2006 at $230,900. In February, existing homes sales increased 4.4%, and the median home price advanced 2.4%. The ratio of monthly sales to the inventory of homes for sale was 9.5 months, versus 5 months in a healthy market. However, 45% of the sales in February were foreclosures, and that proportion will remain high in coming months. Since foreclosed sales represent forced selling, the persistently high level of foreclosures will continue to push home prices lower. As home prices fall another 5% to 10% or more, more home owners will realize that their mortgage exceeds the value of their home. An increasing number are simply choosing to walk away, since they have nothing to lose.

According to RealtyTrac, job losses result in a home foreclosure 10% to 15% of the time. If job losses narrow from the monthly average of 670,000 in the first quarter to 325,000, almost 3 million more jobs will be lost before year end. That will translate into another 300,000-450,000 foreclosures, and an unemployment rate of almost 11%. But what if that estimate of job losses is too optimistic?

New research by the Federal Reserve and Boston University of credit spreads of 900 non-financial companies from 1990-2008 predicted changes in the economy 'phenomenally' well. Based on their initial research on low to medium risk corporate bonds with more than 15 years to maturity, the researchers went back to 1973 and found the analysis still worked well. With the massive widening of corporate bond spreads last fall, the researcher's model predicts the economy will lose another 7.8 million jobs by the end of 2009, and industrial production will fall another 17%. In the spirit of optimism, let's assume this 'phenomenal' model is off by 35%, due to the extreme nature of this credit crisis. That still results in another 5.1 million lost jobs, and an 11% drop in industrial production. In that scenario, the unemployment rate climbs to near 12.5%, the underemployment rate breaches 20%, and another 500,000-750,000 foreclosures result.

The International Monetary Fund (IMF) now estimates the U.S., European, and Japanese financial sectors face losses of $4.1 trillion. Banks are confronting losses of $2.5 trillion, insurers $300 billion, and other financial institutions $1.3 trillion. To date, the banking sector has written down $1 trillion of expected losses. The IMF estimates that U.S. and European banks need to raise $875 billion in equity by next year to return to pre-crisis levels.

Over the last week a number of banks have reported first quarter earnings, which was a pleasant surprise. Citigroup said it made $1.6 billion. One of the ways Citigroup achieved this gain was booking a profit of $2.7 billion on the decline in Citi's own debt. Say what? Under accounting rules, Citi was allowed to book a one-time gain equivalent to the decline in its bonds because, in theory, it could buy back its debt cheaply and save $2.7 billion over time. Of course, Citi didn't actually do that. Even though more consumer loans went bad in the first quarter, Citi reduced its loan loss reserve from $3.4 billion in the fourth quarter to $2.1 billion in the first quarter, thereby picking up another $1.3 billion of 'earnings'. And the recent change in mark to market accounting enabled Citi to book an additional $413 million in 'profit' on impaired assets. Without theses one-time adjustments, Citi's $1.6 billion in first quarter profit becomes a $2.8 billion loss.

According to a Wall Street Journal analysis of Treasury Department data, the 19 banks that received tax payer funds made or refinanced 23% less in new loans in February versus last October. Why lend money when all you've got to do is make a few adjustments and make even more money.

Between 2000 and 2008, the major credit card companies increased the number of credit cards issued to small businesses from 5 million to 29 million. During that period, many small business owners increasingly relied on their cards to provide short term financing for their business. Spending on small business credit cards increased from $70.4 billion in 2000, to $296.3 billion, according to the Nilson Report. Over the last 15 months, business bankruptcy filings have risen faster than consumer bankruptcies, with the average charge-off rising to $11,000 from $7,000, according to Equifax, Inc. In response, the card issuers have been aggressively scaling back, and have reduced available credit lines by almost $500 billion. Just another example of how the availability of credit to the economy is evaporating, despite all the Fed's efforts.

Industrial production fell 1.5% in March, and is down 12.8% from a year ago. Capacity utilization fell to 69.3%, the lowest since records began in 1967. As I discussed in detail in January, excess capacity is a powerful dynamic. Companies are forced to reduce or eliminate budgeted investments in new equipment, compete for every dollar of revenue, even if it means accepting thinner profit margins, and reduce costs through job cuts. The amount of excess capacity that has been created by the depth of this economic contraction is unprecedented. What most inflation bugs and investors fail to understand is how long it will take to work off the current over hang of excess capacity. If the output gap grows from the current 7% to 10% next year, Goldman Sachs estimates it could be 2015 before all the excess capacity is used up, and that's if GDP grows 4.75% per year! Ironically, one of the reasons the economy is not likely to grow that fast is that business investment will be weaker than in prior business cycles. With so much excess capacity, businesses won't need to materially increase business investment for the next 2 or 3 years.

The economy needs to create 125,000 jobs each month, just to absorb the number of new entrants into the labor market. If job growth were to average 325,000 per month in coming years, it would still take four years to replace all the jobs lost in this recession. With so much excess labor capacity, wage growth will be weak for the next few years, which will make it harder for consumers to increase savings and spending. The combination of less credit availability, weaker business investment and consumer spending will be headwinds whenever the economy emerges from this recession.

The Untied States is mired in the deepest cyclical contraction since at least World War II, and arguably the depression. Falling home prices led us into this crisis, and home prices are still falling. The financial crisis in 2008 has become the economic crisis in 2009, as more than 2 million jobs were lost in just the first quarter, with another 3 to 5 million likely before year end. With the unemployment rate headed over 10%, and maybe up to 12% next year, the default rate on every type of consumer credit – (prime mortgages, Alt-A mortgages, Option Arm mortgages, sub-prime mortgages, home equity lines, credit cards, auto loans, student loans) – is headed much higher. Commercial real estate values are plunging, and corporate default rates are set to soar. Although every bank will 'pass' the government's stress test, some banks will fail the real world stress test, and need billions more in capital. Sooner or later, the Treasury Department will likely have to go hat in hand asking for more money from Congress for some of the banks. For the first time since World War II, the global economy will contract in 2009, so there aren't many places to hide. Although it is welcome to see a few 'green shoots', in this case, those green shoots are unlikely to yield a bountiful harvest in 2010.

In addition to the daunting cyclical problems challenging the economy, there are a number of significant secular issues I've discussed before that will make it even more difficult for a self sustaining recovery to develop in 2010. Between 1982 and 2007, the amount of Total debt grew from $1.60 to $3.53 for each $1.00 of GDP. This was made possible as the cost of money fell from 15% to 20% in 1982 to the generational lows of the last few years. As interest rates fell, consumers were able to take on more debt, without their monthly payments increasing very much.

Household debt has increased from $.44 in 1982 to $.98 for each dollar of GDP in 2007. However, there is no more relief coming from lower rates, so consumers are going to have to pay for their debt from income. From the mid 1990's until 2007, most consumers had the luxury of believing that their homes and 401Ks would provide most of what they would need for their retirement. The saving rate fell from over 8% 15 years ago to near 0% in 2007. The last 18 months has convinced them they need to increase their savings. The saving rate has rebounded to near 4% in the last six months, which is one reason why the economy has been so weak. As debt levels increased over the last 25 years, GDP was boosted as consumer's bought cars, bigger homes, second homes, went on nice vacations, and basically lived the good life. However, since 1966, each dollar of additional debt has given the economy less of a boost. In 1966, $1 dollar of debt boosted GDP by $.93. But by 2007, $1 dollar of debt lifted GDP by less than $.20.

The message from these facts is fairly clear. Debt levels are high, and any increase in interest rates will impose a bigger burden on the economy and quickly stunt growth. Consumer debt is already so high and interest rates are so low that it will be difficult for consumers to add debt. This means economic growth will be far weaker than the debt induced growth of the last 25 years. As consumers increase their savings, GDP will be lowered by .70% for each 1% consumers increase their saving, since consumer spending represents almost 70% of GDP. In addition, the banking system remains crippled. Lending standards are high and are not coming down with the economy remaining weak. The need for additional capital will lower future lending by several trillion dollars, as banks work to repair their balance sheets and lower their leverage ratios from 30 to the low teens. The securitization markets provide more credit than the banking system, but they remain on life support. Credit availability will remain constrained well into 2010, which represents a headwind than will mute some of the lift from fiscal stimulus.

The diminishing boost given to GDP from each additional $1.00 of debt since 1966 strongly suggests that adding more debt will not return the economy to prosperity. I am reminded of a movie from the 1950's, 'The High and the Mighty'. It starred John Wayne and Robert Stack and was about an airline flight from Honolulu to San Francisco. During the flight, one of the engines fails, but they are past the point of no return, so they must try to make it to San Francisco. Over the last 60 years, the United States has used a combination of fiscal stimulus and monetary policy to soften each recession and spur the subsequent recovery, with a fair amount of apparent success. From 1982 until 2007, the U.S. only experienced two shallow recessions that each lasted just 8 months. This stretch of 25 years may be the best 25 years in our economic history. But much of this prosperity was bought with debt, as the ratio of debt to GDP rose from $1.60 to $3.50 for each $1.00 of GDP. Sometime in the last 25 years, we passed the point of no return. Unfortunately, Hollywood won't get to write the script on how this ends.

E. James Welsh

[briarberry] 03/5/2009 23:19

How many years of supply left at current rate of use...

[briarberry] 03/5/2009 16:11

Citi without the fiddles would have lost $2.8bn...

Citigroup, for instance, said they made $1.6 billion. They did this by booking a one-time gain of $2.7 billion, because the value of Citigroup bonds have fallen (!), giving them the theoretical possibility of buying back their debt at a discount. And with consumer and credit card loans showing more weakness, Citi decided to REDUCE its loan loss reserves, allowing it to show another $1.3 billion in profit. And then there was the profit of $400 million from the new mark-to-market rules, which allowed them to produce a profit on "impaired assets." Without all these games, there would have been a loss of $2.8 billion.

[briarberry] 01/5/2009 20:08

Chrysler April U.S. sales drop 48% to 76,682 units

Mazda U.S. April sales down 32.1% to 16,139 units


...total US sales around 9.4 million

[briarberry] 01/5/2009 18:18

Ford April sales off 32 pct. Michigan-based Ford sold 133,979 light-vehicles in April, compared with 195,665 for the same month last year. Sales rose from March to April, with Ford selling 2,878 more cars.

Toyota U.S. April sales fall 41.9% to 126,540

Nissan Motors said its U.S. sales fell 37.8% to 47,190 vehicles from 75,855 a year ago.

Honda U.S. April sales down 25.3% to 101,029 units

(worth noting, US sales = 9.12 million vehicles in February, which was the lowest level since December 1981.)

GM U.S. April sales down 33.2% to 172,150 units

BMW U.S. April sales decline 38.4%

(all year over year = I guess sales are flat month over month)

[briarberry] 01/5/2009 18:13

GDP contration could be as bad as -12%...

In other words, without the impact of slowing imports, annualized GDP contraction would have been about 12%.


"An explanation about why the decline in imports is helping GDP growth. As you know, imports are subtracted from GDP. Because imports are declining in absolute terms, you get a positive effect from a negative negative. Just to be clear as to what this chart is telling us: the drop in imports contributed 6.05 percentage points to the GDP growth rate.

What this means is that without the contribution from imports, GDP declined at 12.15% annual rate in Q1. In other words, all of the domestic activity was, as the employment numbers suggested, in free fall! Now, this has some important implications for the profile of growth going forward. When imports stop dropping, and they will, the sign on this term will go back to its normal negative, and when it does, it will expose the true growth rate of the domestic economy. We had best hope that GPDI has gotten back on track by the time the positive effect of negative import growth wears off."

(with charts)

[briarberry] 01/5/2009 13:33

Here is a collection of real estate and economic graphs for data released in April ...

[briarberry] 29/4/2009 14:05

FT reports the volume of commercial mortgages at risk of default has quintupled since the beginning of 2008 as a deteriorating economy has made it increasingly difficult for shops and businesses to keep up with their payments. Special servicers, companies that collect payments from borrowers in distress on behalf of mortgage bond investors, reported $23.7 bln of mortgages under their care at the end of the first quarter, according to Fitch Ratings. That was five times higher than the $4.6 bln of mortgages needing special servicing at the end of 2007. Servicers experienced an almost 50% increase in the volume of distressed commercial mortgages in the first quarter alone. Mortgages for multi-family residential properties suffering from the housing downturn represented the largest share of the troubled loans at 31%, said Fitch. However, mortgages for shops and businesses were catching up, with retail loans at 28% of the distressed pools. "Retail properties were the first property type to see the effects of declining economic conditions and consumer spending," said Stephanie Petosa, analyst at Fitch. "[We have] observed an increase in defaults of retail loans and expect them to eventually surpass multi-family as the highest property type concentration

www.FT.com

[briarberry] 29/4/2009 14:04

Treasury to auction record $71 bln next week

[briarberry] 29/4/2009 13:33

U.S. ECONOMY SHRINKS AT WIDER-THAN-PROJECTED 6.1% ANNUALIZED PACE IN FIRST QUARTER


(punters pointing at a fall in investment)

Business investments fell at a record 37.9% annual rate in the first quarter. Investments in structures dropped a record 44.2%, and investments in equipment and software fell at a 33.8% pace, the biggest drop since 1958. Business fixed investment subtracted 4.7 percentage points from growth.

[briarberry] 28/4/2009 15:35

Case-Shiller home price index

Home prices in 20 major cities fall 2.2% in February after a 2.8% decline in January, according to the Case-Shiller home price index.

[briarberry] 28/4/2009 13:43

Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital ...

Executives at both banks are objecting to the preliminary findings ...

Industry analysts and investors predict that some regional banks, especially those with big portfolios of commercial real-estate loans, likely fared poorly on the stress tests.

[briarberry] 25/4/2009 13:05

Failed Bank List, look at April 2009 (closing date), 8 already this month...


This list includes banks which have failed since October 1, 2000.

2002 to 2007 = 27 banks failed

2008 = 25 banks failed

2009 so far = 29 banks failed

[briarberry] 25/4/2009 00:24

Housing bubble - Subprime loans have default rates in the 40 percent range which is insane. But Option ARMs are quickly catching up followed by Alt-A...


Notice of Financial Default: California Develops a Mortgage Tsunami Pattern Reminiscent of the 2007 Subprime Collapse. Alt-A and Option ARMs Unite.

To put it bluntly, there is major economic distress in the form of further collapsing housing heading down the California highway. You wouldn't know this by looking at short term evidence. Future indicators are flashing red while many people simply choose to ignore bad news and pretend the bottom is in. They will get a rude awakening in a few months. The California economy is still in tatters with unemployment reaching 11.2% which is the highest in the post-War era. Yet some people think this is reason enough to call a bottom. What many fail to realize is the notice of default surge is starting to look very similar to what occurred in early 2007 when we were still reaching peak home prices. The only difference this time is median prices are down by 50% and there is no buffer anymore. First, let us discuss notice of defaults and foreclosures:
...
If these patterns hold, we can expect a gigantic tsunami of foreclosures hitting the market in Q3 and Q4 of 2009.
...
Q1 of 2009 NODs is an ominous sign. You also need to remember that for Alt-A and Option ARMs the average balance is much larger than a subprime loan. Meaning, for each default banks are going to take more of a loss.

[briarberry] 24/4/2009 13:34

I wonder if this is true ? = executives and insiders unload shares at the fastest pace...


April 24 (Bloomberg) -- Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market.


3M Net Income Falls 48% as Sales Decline in All Units (Update1)


Bear Stearns, AIG Dumped $74 Billion in Subprime, CDOs on Fed

[briarberry] 24/4/2009 13:02

sign of the times...


United Parcel Service (UPS) has announced a 55% drop in profits for the first three months of this year compared with a year ago.

The world's largest package delivery company, which is seen as a strong indicator for the US economy, saw net profits fall to $401m (£275.4m).

Revenue fell by 14% from $12.7bn to $10.9bn as people sent fewer packages during the economic downturn.

[briarberry] 22/4/2009 22:20

Apple Inc. says its profit jumped 15 percent in the last quarter, well ahead of Wall Street's expectations despite the global economic downturn

Ebay recorded net income on a GAAP basis of $357.1 million down 22% from $460 million last year.

Continental Airlines Inc. posted a smaller loss than expected and AirTran reported a profit.

IBM net profit fell 1% to $2.3 billion and sales fell 11% to $21.7 billion.

[briarberry] 22/4/2009 21:33

April 22 (Bloomberg) -- Millions of lost jobs mean billions in lost tax revenue for the U.S. government, and billions in additional Treasury debt to fund a federal budget deficit that may soar to more than four times last year's record $454.7 billion.

Employers cut 3.7 million positions from their payrolls in the six months since the fiscal year began Oct. 1, and the unemployment rate reached a 25-year high of 8.5 percent in March. That suggests receipts for April -- the biggest month for tax collection -- are likely to come in well below April 2008, analysts said.

With spending on unemployment insurance and other safety- net programs rising, the deficit is already at a record $956.8 billion six months into the fiscal year. To help close that gap, the Treasury Department has more than quadrupled borrowing, pushing the government deeper into debt.

[briarberry] 22/4/2009 18:13

GM won't make $1 bln debt payment due June 1: WSJ

[briarberry] 22/4/2009 13:43

Earnings, not as bad as last night but MS got hit by commercial real estate...


Morgan Stanley says it lost $578 million, after paying preferred dividends, in the first quarter, hurt by the deteriorating commercial real estate market.

Boeing Co., the world's second-largest plane maker, said Wednesday its first-quarter profit dropped by half.

AT&T 1Q earnings fall 9.7 percent

Wells Fargo & Co., the second- biggest U.S. bank by market value, said first-quarter profit rose 53 percent as low mortgage rates boosted home refinancings

Continental Airlines Inc. said Wednesday it lost $136 million in the first quarter

McDonald's says its first-quarter profit climbed nearly 4 percent

GlaxoSmithKline, the world's second largest drug maker by revenues, posted a 13 percent drop in net profit for the first quarter

Altria Group Inc. said Wednesday acquisition charges and interest expenses outweighed strong cigar sales, leading the owner of the nation's biggest cigarette maker to report a 76 percent drop in its first-quarter profit.