The Credit Crisis Continues

The speed at which Bear Stearns blew up is frightening. Even more frightening is the fact that they are not alone. Rumors and bad headlines abound.

According to the Financial Times, "Lehman Brothers said on Monday it would sell at least $3bn of convertible preferred shares to US institutional investors to help bolster its balance sheet and dispel persistent rumours that it could face liquidity problems similar to those that sank Bear tearns."

Portfolio.com analyzed Lehman's earnings last quarter in this article.

Lehman reaped substantial earnings gains because investors thought it is more likely to go bankrupt. For several quarters, all the investment banks have been taking gains on their liabilities. Say you owe $100 to your friend. But you run into severe problems and your friend starts to figure you can only afford to pay back $95. If you were an investment bank, the magic of fair value accounting dictates that you could get to reduce your liability. What’s more, that $5 gain gets added to earnings. Because investors thought Lehman was more likely to default, its liabilties fell in value and Lehman garnered earnings from this. How much did Lehman win through losing? $600 million in the quarter. How much was its net income? $489 million. Lehman and all the other investment banks are following the accounting rules on this, but that $600 million is hardly the stuff of quality earnings. Indeed, Bernstein’s Hintz called the bank’s earnings quality “weak.”

Now the Financial Times is reporting that UBS is "poised to reveal further writedowns of up to $18bn and seek a capital increase of about SFr13bn ($13.1bn) only weeks after shareholders approved a similar-sized injection from outside investors."

Bennet Sedacca had a great article on Miyanville looking at some of the companies that may be in the news:

Without naming names quite yet, what would you think of a company that accomplished the following in 2007?

• Wrote down book value from $39 billion to $32 billion or from $41.35 to $29.34 per share.
  


• Increased shares outstanding from 868 million to 939 million.
  


• Increased Treasury Stock from 351 million to 418 million.
  


• Increased long-term borrowings from $147 billion to $201 billion.
  


• Increased preferred stock issuance from $3.1 to $4.4 billion.
  


• Increased Total debt to common equity to 2816.81%.
  

and here is another company...

• Wrote down book value from $35 billion to $31 billion or from $32.67 per share to $28.56 per share.
  
• Increased long term borrowings from $127 billion to $160 billion.
  
• Increased total debt to common equity to 2496.53%.
  
• Maintains an $88 billion position in Level 3 assets, or 283% percent of shareholder equity.
  

The two companies? Merrill Lynch and Morgan Stanley.

It is little wonder that the TED Spread is still at historical highs. Banks are afraid to lend their money out to other banks. The spread between Moody's Baa rated bonds and the Treasuries is also at its recent high.

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Monday, March 31, 2008

photo by miyukiutada


Quote for the day:

Laughter is sunshine; it chases winter from the human face.

- Victor Hugo, Les Misérables

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In the news:

Chicago Purchaser's index rose to 48.2 in March from a six- year low of 44.5 in February; economists had projected a gain to 46.

"U.S. Treasury Secretary Henry Paulson is calling for extensive, wide-ranging reforms to the way the government regulates financial markets, including proposals to give the Federal Reserve more power and create new bodies to monitor mortgages and other transactions."

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Personal Income post small increase in February 2008

The U.S. Department of Commerce released the Personal Income figures for February 2008 today.

Real Personal Income increased by 0.28% and Real Disposable Income increased by 0.35% in February from January 2008. Compared to last February 2008, Real Personal Income has only increased by 0.30% and Real Disposable Income has increased by 1.25%.

Personal Income often falls during recessions (although it rose in the recessions of 1970 and 1982). The chart on the right shows the year over year changes in personal income. The monthly data is volatile. Using a 12 month average smoothes out the data.

This next chart compares the 12 month average of the changes in Personal Income with the Unemployment rate. The unemployment rate consistently spikes up during recessions. So far the current unemployment rate has risen a little bit consistent with the early stages of recessions. After recessions the unemployment rate and personal income reverse course around the same time. If we continue down the recession path, I expect the unemployment rate to spike up and Personal Income to most likely trend downwards.

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Friday, March 28, 2008

photo by miyukiutada


Quote for the day:

"The bank is something more than men, I tell you. It's the monster. Men made it, but they can't control it."

- John Steinbeck, The Grapes of Wrath

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In the news:

Fannie Mae and Freddie Mac may raise as much as $20 Billion as part of an agreement that allows them to buy more debt securities. The two companies now have 76% market share which is about double their market share in 2006.

"Nominal incomes rose 0.5% in February, driven largely by the timing of government transfer payments and large bonuses to some workers." "Real consumer spending has risen less than 0.1% seasonally adjusted since November." "Inflation moderated in February, with consumer prices rising just 0.1% for the month. In the past year, consumer prices are up 3.4%, while core prices are up 2%, within the Federal Reserve's target implicit zone."

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Withheld Income and Employment Taxes: A Real Time Insight into Income

The Department of the Treasury reports daily the amount of Withheld Income and Employment Taxes. This gives us insight into income in real time. Matt Trivisonno updates the data daily on his blog. Here is his post discussing the info. Here is his daily chart.

I was able to compile complete monthly data going back to 1998. The chart on the right shows the amount of the Withheld Taxes for the past 12 months updated on a monthly basis starting January 1999 (January 1999 reflects data from February 1998 through January 1999). Withheld Taxes rose at a fast pace from 1998 and started to slow at the end of 2000. The S&P 500 started to decline around the same time that income growth started to decline. Withheld Taxes didn’t start to rise until mid 2004 well past the official end of the 2001 recession. However the rapid decline started to slow at the end of 2002. The S&P 500 bottomed out around the same time. Withheld Taxes is once again declining. Incomes tend to decline during recessions.

This second chart is a monthly version of Matt Trivisonno’s daily chart. It shows the year over year change of the Withheld Taxes for the past 12 months updated on a monthly basis. This shows how the S&P 500 is forward looking. When Withheld Taxes are starting to slow the S&P 500 declines even before the growth rate goes negative. Conversely the stock market rebounds as the decline rate starts to improve even before it turns positive.

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Thursday, March 27, 2008

photo by miyukiutada


Quote for the day:

"Fear can't hurt you any more than a dream."

- William Golding, Lord of the flies

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In the news:

The final GDP figure for fourth quarter 2007 was unrevised at 0.6%. "For the current quarter, which ends Monday, economists expect growth to be flat. For the second quarter, economists expect GDP to fall 1%."

Meredith Whitney, an analyst for Oppenheimer & Co., says Merrill Lynch may post a loss of $3 per share and write down $6 billion of assets; she says UBS may lose lose $2.75 per share after writing down about $11 billion.

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New Home Sales continue their fall last month

The U.S. Census Bureau and the Department of Housing and Urban Development released the New Home Sales figures for February 2008 today.

Sales of new one-family houses in February 2008 were at a seasonally adjusted annual rate of 590,000 which is 1.8% below the January 2008 rate of 601,000 and is 29.8% below the February 2007 rate of 840,000.

There is currently 9.8 months supply of new homes. Months Supply is the number of months it would take to sell all the homes at the current sales pace if no new homes were added. Above 6 months supply puts pressure on home prices. The median home price rose to $244,100 from $225,600 posted last month, but is below February 2007’s median price of $250,800. Median home prices for new homes are very volatile as the chart on the right shows.

As mentioned in this post, although the situation is slowly improving, more new homes are still being built than are being sold.

The sales pace is also deteriorating at a faster pace. Since May 2007, Sales for the month compared to 2005 (highest rate in the last 7 years) and 2001 (lowest rate in last 7 years) has deteriorated every single month excepting October 2007 when it fell at a slightly slower rate than the previous month. March is typically the busiest month of the year for New Home Sales. It will be interesting to see how New Home Sales perform this month.

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Wednesday, March 26, 2008

photo by Pierre Éthier


Quote for the day:

"The nature of bad news infects the teller."

- William Shakespeare, Messenger in "Antony and Cleopatra"

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In the news:

Citigroup shares fall after Meredith Whitney estimates Citigroup may writedown $13.1 billion in assets in the first quarter. "She cut her full-year estimate for Citigroup to a loss of 15 cents a share, down from her previous forecast of a 75 cent profit."

Durable goods orders fell 1.7% in February; Economists had expected a rise of 0.5%.

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Case Shiller Home Price Index Falls at Record Pace

The S&P/Case-Shiller Home Price Indices were released today reflecting data through January 2008.

The Composite-10 posted its largest annual decline on record of 11.41%. Prices for January were lower than December 2007 by 2.22%. The index has now declined for 19 months in a row.

Charlotte is now the only city in the Composite-20 to show a year over year gain. Seattle and Portland slipped from being positive last month to the negative column.

Using the CME futures, I have constructed what the futures market is expecting home prices to do over the next few years. The CME futures market is thinly traded. This previous post goes into detail on the CME futures market and my methodology for constructing the futures info. I have smoothed out the CME futures charts by taking out some data points that reflected old data because there hasn’t been recent activity. Due to limited activity, I am showing prices for the individual cities one year out. The Composite index has more data and the charts reflect prices through 2010.

Here are the charts for the 10 cities in the Composite-10 with their projected future values. This is followed by the 3 cities in the Composite-20 to last show annual gains (Seattle, Portland, and Charlotte). These cities are not traded on the CME and therefore do not have projected values. You can click on the charts for a larger view.

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Tuesday, March 25, 2008

photo by peasap


Quote for the day:

"When I used to read fairy tales, I fancied that kind of thing never happened, and now here I am in the middle of one! There ought to be a book written about me, that there ought!"

- Lewis Carroll, Alice's Adventures in Wonderland

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In the news:

The Conference Board's confidence index falls to a five year low; their expectations index falls to the lowest level since 1973.

Home prices fall by 10.7%, the most on record; 19 out 20 cities now show year over year declines.

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Existing Home Sales prices fall; sales rise

The NAR released the existing homes sales data for February 2008 today.

Seasonally adjusted sales increased by 2.86% to an annual sales pace of 5.030 million a year from 4.89 million a year in January 2008. Year over year, sales decreased by 23.79% from an annual sales pace of 6.6 million in February 2007. The chart on the right compares existing home sales to new home sales.

Median Sales Prices are continuing to fall. The median sales price of $195,900 in February 2008 was 1.9% lower than last month’s median sales price of $199,700. Year over year prices in were lower by 8.24% than February 2007’s median sales price of $213,500 (compared to a year over year decline of 5.31% last month from January 2007’s median sales price of $217,400). If prices were to stay the same next for the month of March, the year over year decline would reach 9.89% from March 2007’s median of $217,400.

As discussed in this previous post, earlier this month the NAR predicted that the median sales price for 2008 would “decline 1.2 percent to a median of $216,300 this year, and then increase 3.5 percent to $223,800 in 2009.” The NAR did not reference that projection in today’s press release. In order to reach the median forecast, future months would have to exceed the median projection of $216,300 to make up for these two month’s shortfall.

Inventory fell from 10.2 months supply to 9.6 months supply thanks to a fall in inventory. Inventory typically grows in the spring and summer. Over 6 months supply puts pressure on home prices. These next few months are very important for the housing market.

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Monday, March 24, 2008

photo by raindog


Quote for the day:

"It's a job that's never started that takes the longest to finish."

- J.R.R. Tolkien

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In the news:

JPMorgan Chase raises its bid for Bear Stearns to $10 a share.

"Federal Home Loan Banks were freed to increase their purchase of mortgage-backed bonds by about $150 billion as part of a government effort to pump money back into a market that slumped as the housing crisis deepened."

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Sales Tax Revenue falls faster in California and Florida

Year over Year Sales and Use Tax Revenue fell in California by 5.54% last month. Florida’s Sales Tax Revenue fell by 7.23% and is declining faster than it did during 2001 Recession. With consumer spending down that much, both states are clearly in recessions. New York grew by 0.29% over the low point reached last February. Texas continued its strong performance, growing by 6.64%.

As discussed in this previous post, these states are the 4 largest states in terms of contribution to GDP. In 2006, California contributed 13.2%; Texas, 8.1%; New York, 7.8%; and Florida, 5.4%. Together they accounted for 34.6% of GDP. Averaged together weighted by GDP contribution, the composite for the 4 states fell by 1.62%. Florida and California are two of the hardest hit states in terms of housing depreciation. If housing prices continue to slide, consumer spending will problably continue to be weak.

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Thursday, March 20, 2008

photo by fmc.nikon.d40


Quote for the day:

"Nothing travels faster than the speed of light with the possible exception of bad news, which obeys its own special laws."

- Douglas Adams, "The Hitchhiker's Guide to the Galaxy"

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In the news:

Weekly Initial Unemployment Claims rise to 378,000. The 4 week average rises by 6,000 to 365,250.

FedEx's 3rd Quarter profit drops 6% and the company offers a bleak outlook.

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New Home Starts and Completions Fall, But not Far Enough

The New Residential Construction figures for February 2008 were released yesterday by the U.S. Census Bureau and the Department of H.U.D.

Single-family housing starts were at a seasonally adjusted annual rate of 707,000 and were down 6.7% from January 2008 and were down 40.5% from February 2007. Single-family housing completions were at a seasonally adjusted annual rate of 903,000 and were down 4.6% from January 2008 and were down 30.6% from February 2007. Here is a chart showing the different components of housing.

This previous post discussed the pressures on home prices that excess inventory exerts.
From the number of houses for sale, it appears that inventories are shrinking. However sales are falling faster, so inventory is still increasing. This next chart compares the amount of houses completed for sale every quarter to the number of new home sales for the previous quarter. New homes are counted when a home goes into contract. Builders try to have contracts lined up before they complete the house. Up through the end of 2005, homes were being sold as fast as the builders could build them. Starting the first quarter of 2006, there were more homes being completed than sold. Since then there have been 244,000 more homes built than have been sold.

In 2007, 74% of the homes completed were intended for sale. The rest were built by owner or for rental use. At a 74% rate, January’s completions equate to 737,780 homes for sale, and February equates to 668,220 homes for sale. Seasonally adjusted sales in January 2008 were at a pace of 588,000 a year. There are still more homes being completed than are being bought.

In 2007, 73% of the homes started were intended for sale. At a 73% rate, January’s starts equate to 553,340 homes for sale, and February equates to 516,110 homes for sale. This is slightly lower than the current sales pace of 588,000 a year. At the current pace of starts and sales, the amount of excess homes will be sold off in the middle of 2011. New home starts look like they will continue to weaken.

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Wednesday, March 19, 2008

photo by Elite PhotoArt


Quote for the day:

"When you're looking into the abyss, you don't quibble over details."

- New York Senator Charles Schumer

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In the news:

Regulators for Fannie Mae and Freddie Mac cut the companies' surplus capital requirement from 30% to 20% in an effort to expand their combined $1.5 trillion in mortgage investments.

Morgan Stanley beats earnings estimates.

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PPI for February remains high

The Bureau of Labor Statistics released the PPI numbers today. PPI took a back seat to Lehman and Goldman’s earnings, the rate cuts, and the resurgent stock market.



PPI rose 0.35% (4.15% annualized) over last month and 6.75% year over year. Core PPI rose 0.55% (6.59% annualized) over last month and 2.49% year over year. PPI has paused around the 7% range. Core PPI has surged in the last two months. It will be important to see what happens with inflation if we are entering in a recession. Often a slowdown will lead to a drop in inflation. However, this time around international pressures like the surging inflation in China and the hot commodity prices may keep the pressure on.

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Tuesday, March 18, 2008

photo by skyseeker


Quote for the day:

"Models work when they are appropriate for the particular circumstance, but some of the best investment judgments over time have come when people recognized that models derived in other periods were broken or not directly relevant."

Abby Joseph Cohen

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In the news:

Goldman Sachs and Lehman Brothers beat earnings estimates.

Investors are betting on a 1.0% rate cut by the Fed today.

PPI rose by 0.3%; core PPI rose by 0.5%.

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Stock Market rebounds again after large Gap Down

The SPY (tracks the S&P 500) opened down 2.345% today. Counting today, since 1994, the SPY has gapped down more than 2.25% 17 times. It has closed higher than it opened 16 times with an average gain of 2.89%. Today SPY continued the trend closing 1.37% higher.

I discussed this trend in this earlier post. Here is the updated spreadsheet.



Here is a look back at the days with largest gap downs with intraday charts going back to 1998.

9/17/1998: The stock market was affected by the Russian/Emerging Market Crisis. Russia defaulted on their government bonds in August and September. Long Term Capital Management (LTCM) was unraveling due to related highly leveraged trades. LTCM was bailed out by the Fed on 9/24/1998.



9/21/1998: Russian/Ererging Market/LTCM Crisis.



10/8/1998: LTCM used up $1.9 billion of $3.6 billion injected into the fund the prior week with the Fed bailout. Another hedge fund, Tiger Management, lost $2 billion on October 7 because of the Yen Currency bets.



1/13/1999: Brazil scraps their currency support and lets their currency float resulting in currency devaluation.



03/13/2000: The Nikkei closed down 560 points (2.8%) as Japanese Q4 GDP was down 1.4 from the previous quarter. S&P Futures were down 27 points before open and Nasdaq futures were at a lock-limit down of 82.



04/27/2000: Nikkei closed down 115 points (0.6%); Korean Kospi fell 21 points (3%). U.S. Q1 Employment Cost Index rose 1.4% leading to fears that the Fed would get more aggressive in trying to cool down the economy. S&P futures were 34 points lower and the Nasdaq futures were at a lock limit down of 110 points before open.



03/14/2001: DAX was down 2.5%, FTSE was down 1.65% over concerns about a slowdown spreading due to hawkish ECB. Fitch downgraded 19 Japanese Banks. S&P and Nasdq futures were both trading lock-limit down before open.



09/17/2001: U.S. stock markets reopen after being closed since the 9/11 attack. The Nikkei closed down 5%. U.S. Equity futures were not trading prior to open.



9/21/2001: Nikkei closed down 2.35%; Hang Seng down 4.1%; Dax was down 6.38%, FTSE down 5.46%. S&P Futures were down 38 points and Nasdaq futures were down 48 points before open.



6/26/2002: Nikkei closed down 4.0%; Hang Seng down 2.4%; Dax was down 4.7%, FTSE down 3.1%. S&P futures were down 27 points and Nasdaq futures were down 44 points over WCOM accounting fraud concerns.



07/24/2002: Nikkei closed down 2.6%; Hang Seng down 3.3%; Dax was down 4.2%, FTSE down 3.0%. S&P futures were down 19.2 points and Nasdaq futures were down 18.5 points on weakness overseas and a follow-through of the previous day’s declines of 4.5% for the Nasdaq and 2.7% for the S&P.



1/22/2008: Nikkei closed down 5.7%; Hang Seng down 8.7%; Dax was down 0.9%, FTSE was up 0.2%. S&P futures were down 60.8 points and Nasdaq futures were down 83.8 points. There was a global equity selloff while the U.S. market was closed for MLK day. Fed cuts rates by .75% ahead of its scheduled meeting on 1/30/08.



1/23/2008: Nikkei closed up 2.0%; Hang Seng was up 10.7%; Dax was down 2.0%, FTSE was down 1.0%. S&P futures were down 39.6 points and Nasdaq futures were down 69.4 as ECB says that keeping inflation in check is top priority. Apple issues a disappointing outlook.



3/17/2008: Nikkei closed down 3.7%; Hang Seng down 5.2%; Dax was down3.5%, FTSE was down 2.3%. S&P futures were down 28.4 points and Nasdaq futures were down 46.2 points on news that Bear Stearns was being acquired for $2 a share by JP Morgan Chase. The Fed cuts the discount rate by .25% over the weekend.

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