The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

>

The Washington Post: The huge profits reported this week by some of the nation’s largest banks showed that the government is succeeding in its rescue of the financial industry, but the details of those earnings reports made it clear that the broader economy is not seeing the benefits…

Washington once celebrated such profits as evidence of economic strength, but the current round of earnings has instead become a political problem…
The core business of banking — lending money to companies and consumers — remains deeply troubled. The number of borrowers defaulting on existing loans continued to rise rapidly, and the bankscontinued to respond by shrinking the total volume of their lending…

Speculation via levered trading, inside info and electronic advantage, as well as mark-to-model/fantasy accounting allows a select few banks to greatly profit at the expense of the rest of the country. Funny money concentrates wealth so Main Street has not seen the benefits that have disproportionately accrued to Wall Street since the Great US Stock Bubble commenced over a decade ago.

The media is getting smarter. The NY Times: Citigroup and BofA Report Profits, Aided by Asset Sales Bank of America reported a $3.2 billion profit for the second quarter. Citigroup said it earned $4.3 billion during the period.

But behind the figures was a sober reality: Those happy results were driven by billions of dollars in one-time gains — in the case of Bank of America, by a profit from the sale of a stake in a big Chinese bank and, in the case of Citigroup, by a bonanza from a new joint venture for its Smith Barney division.

Art Cashin, director of floor operations at UBS, has the buzz from the NYSE.

Airtime: Mon. Jul. 20 2009 | 9:08 AM ET

To review: Over the past 5 years, we have witnessed rpoblems develop and than expand in mortgages, credit card receivables, auto loans, and related vehicvles (RVs, Boats, Motorcycles)

The latest headache: Commercial Loans:

U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years, according to an analysis by The Wall Street Journal. At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.

The losses by regional banks on their commercial real-estate loans will be among the most watched details as thousands of banks report second-quarter results over the next two weeks. Many of the most troubled banks have heavy exposure to commercial real estate. So far, 57 banks have failed this year.

The $30 billion estimate is based on financial reports filed by more than 8,000 banks for the first quarter. The trend continued as a handful of major banks reported second-quarter results, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Bank of America Corp. Regional banks tend to have higher exposure to commercial real estate than these big financial institutions.

Given the cutback in consumer spending and the number of failing retail outlets, this should comes as no surprise. Core Retail sales have been awful, making new lows — no greenshoots here.  I’ll see if I can dig up a good chart on this later . . .

>

See also:
Commercial brokers are swimming in empty space
Roger Vincent
Los Angeles Times, July 19, 2009

http://www.latimes.com/business/la-fi-cover-brokers19-2009jul19,0,2255936.story

Source:
Commercial Loans Failing at Rapid Pace
LINGLING WEI and MAURICE TAMMAN
WSJ, July 20, 2009

http://online.wsj.com/article/SB124804759792663783.html

Source:
Another Plan To Fix The Housing Market: Rent-To-Own
Henry Blodget, Aaron Task
Tech Ticker, July 17, 2009 01:15pm EDT

http://finance.yahoo.com/tech-ticker/article/284985/Another-Plan-To-Fix-The-Housing-Market-Rent-To-Own

While it’s not official yet, a private sector rescue of CIT is welcome news to many small businesses, especially many retailers and their vendors weeks before the back to school season begins. Also, many take cues from the trends in BTS in planning their year end holiday season and having CIT’s factoring business alive to fight another day hopefully provides a stable background for planning. The sigh of relief is evident in the rally in global equities, the rise in bond yields, the 7 week low in the $ index and subsequent rise in commodity prices. With the economic calendar light this week, attention will remain on both earnings and revenue season. Also this week, Bernanke gives his semi annual testimony on the economy and monetary policy in front of Congressional members. While the recent discussion on the Fed has been on QE and exit strategies, the fed funds rate at essentially zero and for how long is another dilemma for them.

U.S. Week Ahead: All About Earnings

Investors have been encouraged by the first wave of results this earnings season, but as Chris Noble reports, the pressure’s on next week as 150 S&P companies are scheduled to report, including Yahoo, Apple and Amazon.com.

On Saturday, I posted this chart and wondered why “Some people were calling for a housing bottom.” That generated a ton of emails asking about for further clarification.

The people I referred to were the usual happy talk TV suspects (i.e.,  Cramer) who have been perpetually wrong about Housing for nigh on 3 years. I not only disagree with them, but don’t respect their opinion — essentially headline reading gut instinct big-money-losers. No thanks.

Then there were the slew of MSM who insist each month on reporting that 3% (+/- 11%) is a positive integer. We disposed of that silliness on Friday.

But the crux of the email was over this post. There are a handful of people whom I disagree with, but nonetheless have a great deal of respect for their methodology and process. Over the past year, these have included Doug Kass and Lakshman Achuthan and Bill of Calculated Risk. We may reach different conclusions about a given issue, or disagree on timing, but these are the folks whose opinions force me to sharpen my own.

When I tossed up that chart yesterday,  I had not yet seen Bill’s comments on the subject (McCartney!) but he is one of those people I can respectfully disagree with. We simply have reached different conclusions about the timing and shape of the eventual Housing lows.

There are a plethora of reasons why I believe we are nowhere near a bottom in Housing prices or activity. Here are a few:

• Prices: By just about every measure, Home prices on a national basis remain elevated. They are now far off their highs, but are still remain about ~15% above their historic metrics. I expect prices will continue lower for the next 2-4 quarters, if not longer, and won’t see widespread Real increases for many years after that; Indeed, I don’t expect to see nominal increases for anytime soon;

• Mean Reversion: As prices revert back towards historical means, there is the very high probability that they will careen past the median. This is the pattern we see after extended periods of mispricing. Nearly all overpriced asset classes revert not merely to their historic trend line, but typically collapse far below them. I have no reason to believe Housing will be any different;

• Employment & Wages: The rate of Unemployment is very likely to continue to rise for the next 4-8 quarters, if not longer. This removes an increasing number of people from the total pool of potential home buyers. There is another issue — Wages, and they have been flat for the past decade (negative in Real terms), crimping the potential for families to trade up to larger houses — a big source of Real Estate activity.  Plus, more unemployment means more . . .

• Foreclosures: We likely have not seen the peak in defaults, delinquencies and foreclosures. Many more foreclosures — which are healthy in the long run but wrenching during the process of dislocation — are very likely.  These will pressure prices yet lower. And Loan Mods are not working — they are redefaulting in less than a year  between 50-80%, depending upon the mod conditions themselves.

• Inventory: There is a substantial supply of “Shadow Inventory” out there which will postpone a recovery in Home prices for a significant period of time. These are the flippers, speculators, builders and financers that are sitting with properties that they do not want to bring back to market yet. Given the extent of the speculative activity during the boom years (2002-06), and the number of foreclosures so far, my back of the envelope estimates are there are anywhere from 1.5 million to as many as 3 million additional homes that could come to market if prices were more advantageous.

• Psychology: The investing and home owning public are shell shocked following the twin market crashes and the Housing collapse. First the dot com collapse (2000-03) saw the Nasdaq drop about 80%, then the Credit Crisis of 2008 saw the unprecedented near halving of the market in about a year. Last, Homes nationally have lost about a third of their value since the 2005-06 peak. Total losses to the family balance sheet of these three events are about $25 trillion dollars. These losses not only crimp the ability to make bigger purchases, it dramatically curtails the willingness to take on more debt and leverage. Speaking of which . ..

• Debt Service/Down Payment:  Far too many Americans do not have 20% to put down on a home, have poor credit scores, and way too much debt. All of these things act as an impediment to buying a home. At the same time, to get approved for a mortgage, banks are tightening standards, including 1) requiring higher Loan to Values for purchases; 2) better credit scores to get approved for a mortgages; 3) Lower levels of overall debt servicing relative to income for applicants. Yes, the NAR Home Affordability Index shows houses as “more affordable,” but it conveniently ignores these real world factors.

Deleveraging: For the first time in decades, the American consumer is in the process of saving money and deleveraging their balance sheets. After a 40 year credit binge, its long overdue. The process is likely to go on for years, as a new generation is losing confidence in the stock market, Corporate America and their government. Think back to the post-Depression generation that were big savers, modest consumers, who eschewed credit and borrowing.  The damage is going to take a while to repair.

There are more reasons I expect the Real Estate market to remain punk for many years, but these are a good place to start when considering the question.

The Housing Boom & Bust, and the 2002-07 credit bubble created massive excesses. More than anything, it is going to take time to resolve them.

>

Update: July 20, 2009 1:30 pm

One last element that is so obvious I forgot to include it:  Zero % Interest Rates.

As many of you have written, when rates are this low, they only have one direction to go: Up.

>

See also:
Housing Starts: Is this the Bottom?
CalculatedRisk, 3/17/2009

http://www.calculatedriskblog.com/2009/03/housing-starts-is-this-bottom.html

Ritholtz: “Why are people calling a bottom for Real Estate?”
CalculatedRisk, 7/18/2009

http://www.calculatedriskblog.com/2009/07/ritholtz-why-are-people-calling-bottom.html

Housing Starts: A Little Bit of Good News
CalculatedRisk, 7/18/2009

http://www.calculatedriskblog.com/2009/07/housing-starts-little-bit-of-good-news.html

The Jalopy Economy
Jeffrey Gundlach
TCW, 06/15/2009

http://www.tcw.com/cmRoot/Funds/CIOLetters/JGLetter_061509.pdf

Previously:
NAR Housing Affordability Index is Worthless (August 13th, 2008)

http://www.ritholtz.com/blog/2008/08/nar-housing-affordability-index-is-worthless/

New Home Starts (July 18 2009)

http://www.ritholtz.com/blog/2009/07/new-home-starts-2/

Housing Starts Fall 46% (July 17, 2009)

http://www.ritholtz.com/blog/2009/07/housing-starts-fall-46/

Looks like a temporary credit line deal may be imminent:

CIT Group Inc., the 101-year-old commercial finance company seeking to avoid collapse, is considering an offer from some of its largest bondholders to provide $3 billion in bridge financing, according to two people briefed on the firm’s deliberations.

The lender’s board was scheduled to meet today to discuss the offer, which would give the New York-based company a chance to restructure its debt outside of bankruptcy, said one of the people, who declined to be identified because the talks are confidential.

CIT needs time to strike deals with bondholders to reduce debt after the U.S. wouldn’t give the firm a second bailout. CIT, which has reported $3 billion of losses in the last eight quarters, received $2.33 billion in funds from the U.S. Treasury in December and hasn’t been given access to the Federal Deposit Insurance Corp.’s debt-guarantee program.

This will provide CIT Group time to do a debt for equity swap.

Sounds like good money after bad . . .

>

Sources:
CIT Group Said to Weigh $3 Billion Financing Offer
Pierre Paulden and Linda Shen
Bloomberg, July 19 , 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=acSU34bPB0Pw

Bondholders Plan CIT Rescue
JEFFREY MCCRACKEN and SERENA NG
WSJ, JULY 20, 2009

http://online.wsj.com/article/SB124804619825363655.html

CIT Is Near Deal for $3 Billion Loan to Avert Bankruptcy
MICHAEL J. de la MERCED
NYT, July 19, 2009

http://www.nytimes.com/2009/07/20/business/20bank.html

Terrific chart accompanying this Sunday Times article by Louis Uchitelle, titled When, Oh When, Will HELP Be WANTED?

>

Chart via NYT

>

Source:
When, Oh When, Will HELP Be WANTED?
LOUIS UCHITELLE
NYT, July 18, 2009

http://www.nytimes.com/2009/07/19/weekinreview/19uchitelle.html

At a recent community forum on the economy, Professor Joseph Stiglitz argued in favor of temporary bank nationalization, calling it “not that big of a deal” and essential to changing incentive structures. “When the economy recovers, you privatize again,” he said.