by CalculatedRisk

From The Times: Banks may need further support from taxpayers as recession bites

Britain's banks may need to raise capital above and beyond the £50 billion of taxpayer-underwritten money already earmarked for them.

The Bank of England's report into financial stability today suggests that a recession as severe as that of the early 1990s would lead to credit losses of £130 billion for Britain's six biggest financial institutions and possibly wipe out the entire government-backed funding package.

The U.S. GDP is about five times the U.K, and that would suggest the eventual cost of the U.S. bailout might be over $1 trillion.

Note: £130 billion X 5 / exchange rate 0.646329 = $1 trillion.

That is less than the number Professor Krugman speculated about over the weekend:

Do the math ... these numbers seem to suggest that an eventual outlay of $2 trillion is in the realm of possibility.

But more might be required.

by CalculatedRisk

From the WSJ: GM May Get Loan for Chrysler Deal

The Department of Energy is working to release $5 billion in loans to General Motors Corp. ... The funds would come from a pool of $25 billion in low-interest loans approved by Congress to help Detroit retool its plants to meet new fuel-efficiency standards. It's not clear how quickly the money could be made available or whether it would come with strings attached.

And from Reuters: US Treasury working on aid for GM, Chrysler merger

The U.S. government is considering direct financial assistance to facilitate a possible merger between General Motors Corp and Chrysler ... The Treasury Department is weighing aid of at least $5 billion, which could include capital injections and government purchases of bad auto loans ...

It looks more and more likely that GM will acquire Chrysler.

Also of interest, just last week Daimler wrote the value of their Chrysler holdings down to zero according to a report in the Free Press: Daimler: Chrysler worth nothing

The German automaker has depreciated its stake in Chrysler to zero from $268 million at the end of June, the company said Thursday. A little over a year ago, the company valued its 19.9% stake in Chrysler at $2.2 billion.

by CalculatedRisk

From MarketWatch: Wal-Mart U.S. to add remodels, trim new store growth

Capital spending for Wal-Mart U.S. is expected to decline to $5.8 billion to $6.4 billion for fiscal 2009 from $9.1 billion last year. For fiscal 2010, capital spending is pegged at $6.3 billion to $6.8 billion ...

Just more evidence of the imminent non-residential construction downturn.

by CalculatedRisk

New home sales in 2008 might be at the lowest level since 1982. However adjusted for changes in owner occupied units, the current year is the worst on record.

The following graph shows both annual new home sales (from the Census Bureau) and sales through September.

Click on graph for larger image in new window.

In 2008, sales through September (before revisions) have totaled 402 thousand. This is slightly ahead of the pace in 1991 (391 thousand sales through September).

However sales have slowed in the 2nd half of 2008, and it appears that annual sales might be below the 509 thousand in 1991. It will probably be close, but if sales are below the 1991 level, this would mean sales would be the lowest since 1982 (412 thousand).

Of course the U.S. population and the number of households were much lower in 1982. In 1982 there were 54.2 million owner occupied units in the U.S., in 1991 there were 61.0 million, and there are approximately 76 million today.

If we use a ratio of owner occupied units to compare periods, the low in 1982 was 412 thousand X (76/54.2) = 578 thousand units (based on the number of owner occupied units today).

The calculation for 1991 gives 634 thousand units (to compare to today).

By this measure, 2008 is the worst year for new home sales since the Census Bureau started tracking new home sales (starting in 1963).

by CalculatedRisk

I spoke with a senior manager at a public company this morning, and his company has just received loan commitments from two major lenders for an acquisition. Both lenders are on the list of banks receiving capital from the Treasury. This is a marginal credit risk deal, so I consider this a positive sign. The deal isn't done, but this is definite progress. (Note: the company is publicly traded so I can't reveal any details).

LIBOR: From the WSJ: Credit Gauges Little Changed

[LIBOR was] 3.5075%, according to Monday's daily Libor fixing by the British Bankers Association. That's down from 3.51625% Friday ...

The yield on 3 month treasuries: 0.82% up slightly from 0.80% (unchanged)

The Fed is expected to lower rates this week by anywhere from 25 bps to even 75 bps, but I'd still like to see the three month treasury closer to 1.0% (or whatever the Fed Funds rate is this week). The effective Fed Funds rate is about 0.93%, so the three month yield is still a little low.

The TED spread: 2.76 up slightly from 2.70 (slightly worse) This is still way too high. I'd like to see the spread move back down to 1.0 or lower - at least below 2.0.

The two year swap spread from Bloomberg: 117.75 down from 125.02 (better). I'd like to see this under 100.

Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales. The Treasury announced another $40 Billion for the Fed this morning - no progress.

The A2P2 spread is 4.32, down from 4.48. better.

During a recession, this spread usually increases because the risk of default for lower quality paper increases. However the recent values (over 400 bps) are far in excess of normal. If the credit crisis eases, I'd expect a significant decline in this spread.

The progress is slow, but this is a positive day in the credit markets.

by CalculatedRisk

According to the Census Bureau report, New Home Sales in September were at a seasonally adjusted annual rate of 464 thousand. Sales for August were revised down slightly to 452 thousand.

Note that the most recent wave of the credit crisis started in mid-September. Since New Home sales are reported when the contract is signed, September sales were only partially impacted by the credit crisis.

Click on graph for larger image in new window.

The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Notice the Red columns for 2008. This is the lowest sales for September since 1981. (NSA, 36 thousand new homes were sold in September 2008, 28 thousand were sold in September 1981).

As the graph indicates, sales in 2008 are substantially worse than the previous years.

The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.

Sales of new one-family houses in September 2008 were at a seasonally adjusted annual rate of 464,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 2.7 percent above the revised August rate of 452,000, but is 33.1 percent below the September 2007 estimate of 694,000.

And one more long term graph - this one for New Home Months of Supply.

"Months of supply" is at 10.4 months.

Note that this doesn't include cancellations, but that was true for the earlier periods too. Sales are falling quickly, but inventory is declining too, so the months of supply is slightly lower than the peak of 11.4 months in August 2008.

The all time high for Months of Supply was 11.6 months in April 1980.

And on inventory:

The seasonally adjusted estimate of new houses for sale at the end of September was 394,000. This represents a supply of 10.4 months at the current sales rate

Inventory numbers from the Census Bureau do not include cancellations and cancellations are falling, but are still near record levels. Note that new home inventory does not include many condos (especially high rise condos), and areas with significant condo construction will have much higher inventory levels.

As I noted a couple of months ago, I now expect that 2008 will be the peak of the inventory cycle for new homes, and could be the bottom of the sales cycle for new home sales. But the news is still grim for the home builders. Usually new home sales rebound fairly quickly following a bottom (see the 2nd graph above), but this time I expect a slow recovery because of the overhang of existing homes for sales (especially distressed properties).

This is a another very weak report.

by CalculatedRisk

From the WSJ: Capital One, SunTrust to Sell Government Preferred Stock

A host of financial firms announced they will sell preferred stock and warrants to the federal government ...

The biggest morning disclosure was Capital One Financial Corp.'s $3.55 billion sale of preferred stock and warrants to the Treasury Department, followed by SunTrust Banks Inc. at $3.5 billion. ...

Other firms announcing their participation included Fifth Third Bancorp at $3.4 billion, Ohio-based regional bank KeyCorp at $2.5 billion, investment bank and asset manager Northern Trust Corp. at $1.5 billion and Huntington Bancshares Inc. at $1.4 billion.

by CalculatedRisk

Hang Seng off 12.7%

Nikkei 225 off 6.4%

FTSE 100 off 3.4%

DAX off 3.9%

S&P; futures off 20 points.

Another interesting day ...

by CalculatedRisk

From Bloomberg: IMF Says Hungary to Receive `Substantial Financing Package'

The International Monetary Fund said it will announce a "substantial financing package" for Hungary ... "in the next few days" ...

by CalculatedRisk

Nothing blew up today ... at least so far ... I guess that is progress.

This will be a heavy news week, especially for housing with New Home sales released on Monday, and homeownership and vacancy rates released on Tuesday. The FOMC will announce a rate cut on Wednesday, and advance Q3 GDP will be released on Thursday (the investment numbers will be especially interesting). And much more ...

I expect most of the economic news will be bad. So far the futures are basically flat.

Bloomberg Futures.

Index Futures from Barchart.com (active futures have a time not a date)

CBOT mini-sized Dow

Should be another interesting week.

by CalculatedRisk

From the WSJ: IMF to Lend $16.5 Billion to Ukraine (hat tip Lyle)

The International Monetary Fund Sunday announced its second national rescue plan in a matter of days, saying it would lend $16.5 billion to Ukraine.

The announcement follows Friday's a $2.1 billion loan to Iceland ... Pakistan and Hungary are also talking to the IMF.

by CalculatedRisk

How much will the Fed reduce the Fed Funds rate on Wednesday? And does it matter?

First, here are the latest Fed Fund probabilities from the Cleveland Fed.

Click on graph for larger image in new window.

Market participants expect a 50 bps rate cut to 1.0%, however there is some expectation of a 75 bps cut (to 0.75%).

Earlier this month, I speculated about an intermeeting rate cut: Will there be an Intermeeting Fed Rate Cut?. Sure enough the Fed cut the Fed Funds rate four days later - but market participants were disappointed with what was perceived as a feeble 50 bps effort.

Remember Bernanke wrote in 2004: What Explains the Stock Market’s Reaction to Federal Reserve Policy?

The most direct and immediate effects of monetary policy actions, such as changes in the federal funds rate, are on the financial markets; by affecting asset prices and returns, policymakers try to modify economic behavior in ways that will help to achieve their ultimate objectives.
...
The unexpected 50-basis-point intermeeting rate reductions on 3 January [2001] and 18 April [2001] were both greeted euphorically, with one-day returns of 5.3% and 4.0% respectively. The 50-basis-point rate cut on 20 March [2001] was received less enthusiastically, however. Even though the cut was more or less what the futures market had been anticipating, financial press reported that many equity market participants were “disappointed” the rate cut hadn’t been an even larger 75 basis point action. Consequently, the market lost more than 2%.

Bernanke can probably add the Oct 8th 50 bps rate cut to his list of "disappointing cuts" since the market sold off about 10% over the two days following the Fed action.

Of course the FOMC just sets the target rate. The effective Fed Funds rate has already been at or under 1% for the last couple of weeks. So the Fed will just be making this official.

And does it even matter? Probably not much at this point. But I suspect market observers will be focused on the economic outlook.

Note: Dr. Krugman is updating his book "Return of Depression Economics". I think this 1998 paper from Professor Paul on the Japanese experience might be of interest to some readers: It's BAAACK! Japan's Slump and the Return of the Liquidity Trap.

by CalculatedRisk

How much will the decline in oil prices cushion the U.S. recession? That seems like a key question.

Here is an excerpt from Time: What's Behind (and Ahead for) the Plunging Price of Oil

If gasoline drops $1.50 the $900 [the average driver] saves would amount to a big stimulus package. According to Ed Leamer, director of the UCLA's Anderson Forecast, the current price slide could drop another $200-to-$250 billion into consumers' pockets, given that as of the second quarter personal spending for gas fuel oil and other energy was about $442 billion on an annualized basis.

The following graph shows the monthly personal consumption expenditures (PCE) at a seasonally adjusted annual rate (SAAR) for gasoline, oil and other energy goods compared to the U.S. spot price for oil (monthly).

Click on graph for larger image in new window.

At current oil prices, it appears oil related PCE will fall to $300-$350 billion SAAR, from close to $500 billion SAAR in July. This is a savings of $12 to $15 billion per month compared to July. And that would be helpful and definitely provide some cushion for consumers. This might show up as more savings, as opposed to other consumption, but rebuilding savings is probably a necessary step towards rebuilding household balance sheets.

Data sources:
PCE from BEA underlying detail tables: Table 2.4.5U. Personal Consumption Expenditures by Type of Product line 117.

Oil prices from EIA U.S. Spot Prices.

by CalculatedRisk

Christopher Thornberg of Beacon Economics recently estimated the excess housing units in the U.S. at 3 to 4 million.

Click on graph for larger image in new window.

Credit: Dr. Thornberg. See this presentation at the California Self Storage Association (CSSA).

Note: the entire presentation is interesting!

The underlying data is available from the Census Bureau.

It makes sense that there are more housing units than households due to the normal frictions of households moving, normal vacancy rates, and second homes. As an example, according to the Census Bureau, there were 1.145 million housing units rented or sold in Q2 but not yet occupied. This is normal as households move.

Some of the recent increase in the ratio of housing units to households is due to excess housing units (overbuilding), and apparently Dr. Thornberg believes this ratio should decline from about 1.17 to 1.14 or so. With approximately 111 million households in the U.S., and a ratio of 1.14, the U.S. only needs 127 million housing units compared to the almost 130 million housing units currently in the U.S.. That gives 3 million excess housing units.

However I think Thornberg's estimate is too high. In an earlier post, Q2: Homeownership and Vacancy Rates, I estimated the excess rental units, vacant homes, and new home inventory, and calculated that there were "about 1.75 million excess housing units in the U.S." at the end of Q2. I think this is a better estimate.

The Q3 numbers will be released this week.

by CalculatedRisk

Initially I posted a story about a significant plunge in truck sales for Volvo. However the details were misleading because of cancellations.

Here is a story from Bloomberg: European Heavy-Truck Sales Drop 4.8% as Economic Growth Wanes

European heavy-truck sales fell 4.8 percent last month as the credit crisis and concern that a recession is coming deterred companies from expanding fleets.

Manufacturers sold 28,947 trucks weighing 16 metric tons or more in September compared with 30,403 a year earlier, the Brussels-based European Automobile Manufacturers Association said in a statement today. Nine-month deliveries rose 3.5 percent to 250,580 vehicles.

by CalculatedRisk

Click on cartoon for larger image in new window. Used with permission from cartoonist John Ambrosavage at Ambrotoons.com email for ambrotoons