Great interactive chart I meant to get to earlier this week, via the NYT:
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Source:
For Housing Crisis, the End Probably Isn’t Near
DAVID LEONHARDT
NYT, April 21, 2009
http://www.nytimes.com/2009/04/22/business/economy/22leonhardt.html
Here is our latest comment FYI. Barry is wandering the wilds of Michigan and will be back soon with lots of channel observations. Chris
The Institutional Risk Analyst
April 23, 2009
“What’s right about America is that although we have a mess of problems, we have great capacity – intellect and resources – to do some thing about them.”Henry Ford II
(1917 – 1987)
First, next Thursday, April 30, 2009, we will be participating in an important event in Philadelphia, “The Financial System, Banks & Economy: After the Storm…Where Are We Now?” The morning program includes Barry Ritholtz of Fusion IQ, David Kotok and Bob Eisenbeis of Cumberland Advisers, William Poole of CATO Institute and Diane Swonk of Mesirow Financial. For more information or to register, please click here: http://www.interdependence.org/Event-04-30-09.php
Next, we wish to thank the FDIC for the quick response to our last comment (“Can Citigroup Be Restructured Without an FDIC Resolution?”), where we suggested that the public record of the US banking industry is incomplete. We revised same to reflect their views. Bottom line is that the FDIC is presenting the bank unit data gathered from insured depository institutions correctly and consistent with GAAP.
Trouble is, while the current methodology may be precisely correct in a compliance and GAAP sense as it applies to federally insured legal entities, in our view and from a portfolio perspective, the FDIC dataset still is missing significant historic loss data, not just in 2008 but in previous years. Part of this situation stems from the “survivor bias” in the data. More, the impact of the timing of certain transactions and the use of GAAP purchase accounting has created some seemingly significant anomalies in both the historic record of the industry’s loss experience and in how GAAP accounting creates hidden reserves for acquirers, reserves that largely are invisible to retail investors but seemingly create distortions in reported earnings.
One reason that we took the risk of pissing off our friends at the FDIC by persisting with questions about the accounting treatment of the purchase of Wachovia Bank by Wells Fargo (NYSE:WFC), for example, is not only because the Q4 2008 industry data does not, in fact, include the charge-offs from Wachovia, realized losses that total into the tens of billions dollars. No, we were also interested in understanding how WFC got a little side benefit – a “cookie jar” in earnings terms – that is an effective subsidy for WFC to help absorb the cost of remediating the Wachovia portfolio.
Jonathan Weil of Bloomberg News wrote a very good analysis of WFC that puts the size of the cookie jar at $7.5 billion: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6sv0hG.nW7g
For those not familiar with the cookie jar concept, we turn back the pages of the proverbial comic book to pre-2004, when Sanford I. Weill was the King of the Citi and the folks at the SEC were sound asleep when it came to hidden reserves. During Sandy’s shopping spree to build the great financial bodega now know as Citigroup, Weill accumulated a number of acquisitions and, thanks to the benefits of good legal advice and purchase accounting, was able to amass a considerable, undisclosed reserve position.
Yesterday, I had a lunch meeting about Bailout Nation with the folks at Borders HQ in Detroit was quite interesting.
I was over-caffeinated, and essentially babbled away for 2 hours. I did manage to remember to ask a few questions, and learned quite a bit. It was an education for me in a real “Art meets Commerce” kind of way.
There is the creation of content, and then there is the selling of that content. They are two utterly different worlds, bound by a small overlap. (Picture a 2 circle Venn Diagram, with a rather smallish “c”). Quite fascinating to me, as I know little of the publishing/book selling universe, especially in the midst of a severe recession.
We discussed the book, purchase promotions, driving traffic to stores and websites, the Bailout Nation blog (coming soon!), and a bunch of other related things.
They asked me what shows I wanted to do to promote the book, and I gave them the full run down. What really surprised me was their reactions to two of the quasi-news opinion programs — The Daily Show with Jon Stewart, and The Glen Beck Program.
After Oprah, these two are (apparently) amongst the biggest book sellers on TV. Like Oprah, Glenn Beck has a loyal audience, is perceived as very sincere — and moves books.
But the most intriguing “inside baseball” stuff we discussed was the impact of The Daily Show on book sales — in particular, two recent books that were the subject of big TDS segments. These were mentioned as prime examples of the power of Jon Stewart.
The first is House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan. After Stewart raved about the book (“Helluva book — you made finance read like a suspense novel”) when Cohan was on the show April 9th, sales of the book in stores tripled. They have been strong ever since.
The second example was the infamous James Cramer appearance on TDS on March12th. According to the people I had lunch with yesterday, the very next day, sales of Cramer’s book Jim Cramer’s Real Money: Sane Investing in an Insane World went into free fall. They absolutely plummeted — and they haven’t recovered since.
And that’s the power of TDS . . .
While the S&P futures are higher, they are only about 6.5 pts above fair value and back to where they were at 3:35pm yesterday. Earnings from Apple and Ebay are certainly helping this morning.
The late day selloff yesterday in banks is likely evidence of the growing nervousness and stress on the part of investors ahead of the results of the ‘stress test.
The ease or difficulty in the capital raising process for those banks that need money, according to the Treasury, could be the driver of overall market performance after May 4th.
With less bad data in the US over the past month helping to lift confidence, the April Euro Zone services and mfr’g composite index was also less bad today at 40.5, 1.6 pts higher than expected and at its highest level since Oct. The Euro is up in response. Russia cut rates for the 1st time since ’07 to 12.5% from 13%. Claims and Existing Home Sales are out today.
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After last week’s unexpected but likely Easter holiday influenced drop (and Caesar Chavez holiday in CA), Initial Jobless Claims totaled 640k, right in line with expectations and up from a revised 613k last week.
Continuing Claims were 17k higher than expected at 6.137mm and up 93k from last week and continues to highlight the difficulty people are having in finding new jobs even though the pace of firings have stabilized for now based on the initial claims data staying in the mid 600k level over the past 3 months. The Labor Dept said there were no special factors in this week’s data, thus for now at least making last week’s drop an anomaly.
Things are settling down after a wild couple of weeks and months personally. The markets have found some footing, the book is finally off my desk, and the redesign of the site seems to be stable. (Macro Notes still aren’t functioning, but the techs are working be on that).
After a well-earned vacation, I will be getting back to my more regular posting schedule over the next weeks. Expect to see a return to more of the original content, and less of the cut & paste stuff.
A few other surprises are rolling out — including a few killer additions to the Think Tank.
Then, its on to the book tour, which thanks to my location in NYC (and the Media3 studio upstairs) hopefully won’t be too arduous.
Yesterday’s meeting with Borders was very informative, with some very cool inside baseball stuff. I’ll have a post on that later . . .
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On to the lumber yards!
Via Jeff Harding, here’s yet another look at the so-called Green Shoots, and the hangover from the biggest credit bubble in history:
- Consumer prices fell 0.4% in February, the first time since 1955 (54 years).
- Retail sales decreased 1.1% from February to March (seasonally adjusted); sales are off 10.7% from March 2008 (retail and food services decreased 9.4%).
- The net worth of American households – the difference between assets and liabilities — was $51.5 trillion, down $11.2 trillion or nearly 18% from 2007.That sets Americans’ total wealth back to levels lower than 2004. It is the first decline in American household net worth since 2002.
- Mortgage credit fell to $10.5 trillion, the first decline since the Fed started keeping track in the 1950s.
- Americans’ homeowners’ equity as percentage of the value of their homes fell to 43% in 2008—lowest since before WWII.
- Industrial production fell 1.5% in March from a month earlier; down 13% since the recession began in December 2007, worse than every recession since World War II.
- National Federation of Independent Business Small Business Optimism Index for February was down 1.5 points to 82.6 (1986=100), the second lowest level in the 35-year history of the survey. This has significant implications for employment and loan demand.
- According to RGE (Nouriel Roubini) many US banks are insolvent: overall banking capital before the crisis was $1.4 trillion but there are expected losses of $1.8 trillion. Losses from loans and securities generated by US financial institutions are estimated to have been $3.6 trillion at its peak.
- Defaults on corporate bonds bought by U.S. life insurers may cost “substantially” more than losses on securities linked to subprime, Alt-A and commercial mortgages—further deflation.
- According to the most recent data from the U.S. Department of Education, default rates for federally guaranteed student loans are expected to reach 6.9% for fiscal year 2007, and are climbing dramatically.
- Credit cardholders had $962 billion in unpaid balances on general purpose and proprietary cards at the end of 2007, an 8.6 percent increase from the previous year. That figure is expected to climb to $1.2 trillion by the end of 2012, or $6,373 per cardholder.
- Two-thirds of the $154.5 billion of securitized commercial real estate mortgages coming due between now and 2012 won’t qualify for refinancing; Deutsche Bank, Goldman, and others estimate declines in commercial-property values of 35% to 45% from the peak in 2007. They believe the commercial real-estate slump will rival or even exceed the one in the early 1990s, when bad commercial-property debt played a big role in dragging the economy into a recession.
- Deflation continues worldwide: Japan, Germany, and China are all experiencing deflation.
- U.S. unemployment is now at 8.5%.
Nice exercise in reality checking . . .
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Source:
Green Shoots?
Jeff Harding
Daily Capitalist., April 22nd, 2009
http://dailycapitalist.com/2009/04/22/green-shoots/
Good Evening: After spending most of Earth Day solidly and appropriately in the green, stocks returned to Terra Firma late in the session. Various earnings reports and some conflicting stories about the current state of U.S. home prices all contributed to the crosscurrents that ruled Wednesday’s trading. It’s still too soon to say if “countertrend Tuesday” correctly pointed to a resumption of widespread risk aversion, but today’s action hinted that such an outcome is more than possible.
U.S. stock index futures were indicating a lower open this morning after a very disappointing loss announced by Morgan Stanley (see below). Analysts and investors alike bemoaned the write-downs taken and the trading opportunities missed by MS in Q1. With Goldman and JP Morgan using their balance sheets to rake in fixed income profits in the first three months of ‘09, Morgan Stanley decided to hunker down. That MS’s leverage ratio of assets to equity is now closer to 10 than last year’s 30 looks wise to me in this environment, but investors obviously disagreed with this view.
Market participants did their level best to portray the MS results as company specific in the early going, and stocks were soon higher after opening losses of nearly 1%. Positive surprises from AT&T, JC Penney, and Sybase contributed to the comeback in equities, as did one of the stories about housing you see below. The Federal Housing and Finance Agency (where did they come from?) put out a report this morning that tried to claim that U.S. home prices actually ROSE in February. What’s more, this report apparently also stated that inventories of unsold homes are declining. CNBC touted the story, of course, though I think the last story you see below is a more accurate picture of housing. In addition, please see BAC-MER’s take on the mortgage applications data out this morning (see below). In it, David Rosenberg and crew note that while refinancing activity has perked up of late, the number of applications by folks actually looking to buy a house has been falling. They think the April home sales figures are at risk, and I agree that housing is far from being out of the woods.
The major averages couldn’t be bothered with the details, however, and they sauntered their way to gains north of 2% with 40 minutes to go. Whether it was late day profit-taking or more concerns about the upcoming stress test results, I don’t know, but equities had the rug pulled from beneath them as the closing bell approached. Gains in the Dow and S&P 500 turned into losses, while the other indexes finished mixed. The Dow Industrials (-1%) fared the worst and the Dow Transports (+1.6%) held up the best. Treasury prices were on the weak side all day after fixed income investors were reminded just how much debt Uncle Sam will have to issue in 2009 (see below). This figure could total almost $2 trillion, a daunting sum that gave investors pause when they realized that all the sovereign wealth funds combined don’t have that much spare cash to lend us. Yields rose only 2 to 6 bps today, but the curve did steepen as a harbinger of what may lie ahead. The dollar dropped 0.5% and the CRB index was unruffled in gaining a tiny 0.15%.
On the original Earth Day back in 1970, this writer was in a music class with his third grade contemporaries when our teacher put up the following 5 note scale: E G B D F. To mark Earth Day and learn these notes, she introduced us to the concept of the pneumonic device by asking us to come up with a green phrase that matched the letters in the scale. Predictably, we came up with something appropriately simple for 9 year olds: Earth Garbage Brings Death Fast.
I share this vignette because the Earth Day circa 2009 brings to my mind a financially oriented set of words to commemorate the occasion. Given what happened today to Morgan Stanley, various bank stocks, many REITS, and financing entities like CIT Group, let’s try Earnings Ground Banks, Developers, and Financiers on for size. Though this phrase won’t enhance anyone’s musical IQ, it is simple enough to fit right in with the third grade mentality many investors have displayed while chasing financial stocks these past six or seven weeks. The downside reversal today in the major averages in general and the financial stocks in particular may or may not portend an imminent shrinkage of risk appetites. Investors might even find Apple’s earnings news tonight delicious enough to make them hunger for shares of all types tomorrow. But if it really does come down to housing, the health of our banks, and earnings reports that seem to need accounting tricks to make them palatable, then perhaps the rally off the March lows has indeed run its course. Even a third grade investor-to-be might understand that stocks unable to stay in the green on Earth Day may soon be polluting portfolios that are left untended.
– Jack McHugh
U.S. Markets Wrap: Stocks Drop Following Late-Day Bank Slump
Morgan Stanley Posts Bigger-Than Estimated Loss
Soaring U.S. Budget Deficit Will Mean Billions in Bond Sales
Home Prices Gain 0.7% in February From January
Reading snippets of CEO comments after their earnings releases highlights the tug of war between the bulls and the bears over where this economy and stock market are going certainly relative to where it was just 5 weeks ago.
Are the shoots green or some other shade?
Here are some quotes: JCP, ‘sales slightly better, more predictable,’ NSC, ‘still seeing significant pressure on volumes but think things bottom out by June q,’ UTX, ‘seeing signs of stabilization in orders but don’t see significant change in environment,’ COF, ‘unemployment is sort of raging,’ R, ‘there’s no evidence economy is bottoming out and could get much worse,’ AMD, ‘it’s not possible to say demand has hit bottom,’ ETH, ‘Mar business showed improvements from Feb while significantly lower than Mar of last year.’
These comments are taken off Bloomberg so I can’t confirm the exact quote.
Proinsias O’Mahony:
“Blogs have gone from being eccentric postings to become essential financial reading:
SOME OF the savviest and most in-depth analysis of the global banking crisis has come from the financial blogosphere. Luminaries like Nouriel Roubini, Nobel economist Paul Krugman and former IMF chief economist Simon Johnson are all active bloggers while equally valuable material is penned by less well-known financial experts.
Their growing influence and popularity is evidenced by the US Treasury’s recent decision to hold a conference call discussing the latest bank rescue plan with high-profile financial bloggers. Here’s a taste of some of the very best financial blogs.”
Another nice mention of TBP in (of all places Irish Times):
“Second only to Calculated Risk in terms of monthly web traffic, it’s not hard to understand the popularity of Barry Ritholtz’s blog. A market strategist and frequent commentator on CNBC and Bloomberg, Ritholtz’s informality and no-holds barred style is made for blogging.
Prescient in his predictions of large-scale financial meltdown, Ritholtz has also made a number of timely calls on the bullish side, correctly predicting a big rally at the beginning of March.”
Here is the full list:
Congrats to all on the list . . .
C>
Source:
Financial pugilism and offbeat analysis vie for space in blogosphere
PROINSIAS O’MAHONY
Irish Times, Friday, April 17, 2009
http://www.irishtimes.com/newspaper/finance/2009/0417/1224244900698.html
Gary Weiss of Portfolio has just published a profile of Treasury Secretary Tim Geithner:
http://www.portfolio.com/executives/2009/04/22/Treasury-Chief-Tim-Geithner-Profile
He recalls my first experience with Geithner at an NYU conference on risk management hosted by the Stern School several years ago. Even though Geithner admitted yesterday in his congressional testimony that he has no actual financial markets experience whatsoever, you would think that an economist and bureacrat focused on financial policy would have some passing acquiantance with Basel II, especially as the President of the FRBNY.
The more I see and hear Secretary Geithner speak on financial services policy, the more I am convinced that this man has not a clue what he is doing and must therefore be acting at the instruction of others — Bob Rubin, Larry Summers and the folks at GS — IMHO.
Best,
Chris
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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