Wednesday, February 6, 2008

Today's Tidbits






U.S. May be “Teetering on Edge” of Recession that is More Severe Than Last Two
From Reuters
: “"If we do go into recession, it's going to be more severe and long-lasting than the last one," said Jeffrey Frankel, a Harvard professor and member of the private-sector panel that dates U.S. recessions. The nation's last two recessions, in 1990-1991 and 2001, each lasted for just eight months. But the two downturns that ended in 1975 and 1982, when economic conditions bore some similarities to today, each lasted 16 months, making them the longest recessions since the Great Depression of the 1930s, according to the National Bureau of Economic Research, the accepted arbiter of U.S. recessions. The U.S. economy entered the recessions of 1975 and 1982 saddled with huge government budget deficits from spending on social programs and the Vietnam war, and was suffering double-digit consumer price inflation. Frankel said members of NBER's business-cycle dating panel have been in contact with each other over the prospect of a recession through e-mails, but it would likely take months, or perhaps even more than a year, for the panel to determine whether the economy had turned down. Even though the latest data showed a loss of jobs in January, and the largest monthly decline on record in an index of service-sector activity, Frankel thinks a recession is not yet at hand. "My description is that we are teetering on the edge," he said…The last time the economy moved into recession, in 2001, there was a budget surplus, providing an opportunity for extra government spending to boost economic growth. In addition, consumers were not as heavily in debt and credit was more freely available. Consumer spending represents for roughly two-thirds of total U.S. economic output and for the 2007 year consumer spending grew at the slowest pace since 2003. "My biggest concern right now is the consumer. The consumer is highly levered and when the economy faces a credit crunch on in a highly levered scenario, then you have trouble”…”
Homeowners Increasingly Abandoning Mortgages
From CNN
: “Homeowners are abandoning their homes and, more importantly, their mortgages, rather than trying to keep up with rising payments on deteriorating assets. So many people are handing their keys back to lenders that a new term has been coined for it: jingle mail….Current lending practices have created an environment where a measure as extreme as abandoning a home actually makes sense to some people. Many buyers put little or no money down, so they don't have much invested in them. That leaves them with little incentive to keep making payments when a home's market value dips below the balance of the mortgage. The most serious consequence is a tremendous hit to credit scores. For some, that's better than throwing away money they'll never recover by selling their home. And while a mortgage default can savage a person's credit record, trying to pay off a loan they can't afford could be worse for borrowers if it leads to bankruptcy, said Craig Watts, a spokesman for the credit reporting firm Fair Isaac. Credit scores are hurt much more by missing multiple payments - on credit cards, cars and so on - than by a single foreclosure. "The time it takes to regain your credit score [after foreclosure] can be shorter than after bankruptcy," said Watts. It typically takes three years of a spotless payment record after a bankruptcy before credit scores recover enough for someone to think about buying a home again, he said. After abandoning a mortgage, a person may be able to buy a new house in two years or less. And now skipping out on a home is easier, thanks to the Mortgage Debt Relief Act of 2007. Previously, if a bank sold a foreclosed home for less than the mortgage balance and it forgave the difference, the borrower had to pay tax on that difference as if it were income. Now the IRS will ignore it…The trend of walking away is most pronounced among real estate investors, according to Jay Brinkman, an economist with the Mortgage Bankers Association (MBA). But families are doing it too…Beyond anecdotes, some statistics indicate that hard-pressed owners are deliberately courting foreclosure. An analysis by the consumer credit rating agency Experian last spring found that many borrowers were choosing to pay off credit card and other consumer debt before making mortgage payments. They were electing to put their mortgage at risk rather than their credit cards or auto loans. Similarly, Richard DeKaser, chief economist for National City Corp., notes that while all credit metrics are deteriorating, mortgage delinquencies are rising disproportionately. "That makes sense if people are choosing to walk away," he said. And now reports are emerging of homeowners skipping out on mortgages even though they can still afford to pay them.
Wachovia CEO Ken Thompson described these people on an earnings call last month."[These are] people that have otherwise had the capacity to pay, but have basically just decided not to, because they feel like they've lost equity, value in their properties."
Lenders are afraid that borrowers may find it's worth the hit to their credit scores, if they can drastically reduce their housing expenses. Someone with good credit and a $600,000 home in a town with cratering real estate prices could buy a similar house nearby for $450,000, and then let the other $600,000 mortgage go into foreclosure. The stage is set for this kind of thing particularly in California, where huge numbers of buyers used low or no-down deals to buy homes. The trend has even spawned at least one new business, San Diego-based YouWalkAway.com, which for a fee of $1,000 purports to guide clients through the process of ditching their mortgages. It launched in early January, and says it has already signed up 180 clients. California is a bit of a safe haven for these borrowers, since banks that repossess and then sell a foreclosed property for less than the mortgage that was owed on it cannot come after borrowers for the difference - as long as it's the initial mortgage, one that has not been refinanced. So if a borrower owes $200,000 and the bank sells the house for $170,000, the borrower comes out of it debt-free. And for many homeowners, the prospect of becoming debt-free is growing increasingly alluring.”
From FTN: “The WSJ reports that as many as one in four home sales were speculative at the height of the boom rather than the 10% people previously believed. Frankly, we’re not sure who “people” are in this case. Other sources have put the number as high as 30% since 2005.”



Increased Capital May Not Stop Rating Downgrades for Bond Insurers
From Reuters
: “Fitch Ratings on Tuesday said it may cut its top "AAA" rating on MBIA Inc's insurance unit and bond insurers as a whole are likely to face larger losses than previously expected, which may lead to more downgrades. Fitch also said it may cut its "AAA" ratings on bond insurer CIFG, part of French bank Natixis, due to changes in its loss assumptions. Losses by bond insurers are likely to increase due to continuing deterioration in the mortgage and housing markets, Fitch said. "The need to update loss assumptions at this time reflects the highly dynamic nature of the real estate markets in the U.S., and the speed with which adverse information on underlying mortgage performance is becoming available," Fitch said in a statement. If losses increase, the ratings of bond insurers Ambac Financial Group, Financial Guaranty Insurance Co, and Security Capital Assurance Ltd, which operates XL Capital Assurance Inc, are also likely to come under pressure due to their exposures to subprime mortgages, Fitch said.
Bond insurers, including industry leader MBIA, are scrambling to raise capital that rating agencies have said is required for "AAA" ratings. Fitch, however, said on Tuesday that an increase in capital may not be enough to hold the ratings, as an increase in claims in itself would be inconsistent with the top ratings. "A material increase in claim payments would be inconsistent with 'AAA' rating standards for financial guarantors, and could potentially call into question the appropriateness of 'AAA' ratings for those affected companies, regardless of their ultimate capital levels," the rating agency said. MBIA has already raised $1.5 billion in new capital, however this may not be sufficient, Fitch said.
Fitch expects that losses taken by MBIA are likely to increase materially due to the company's significant portfolios of CDOs backed by assets, which includes mortgage-backed securities. This portfolio was around $30.6 billion as of September 30, 2007, Fitch said. CIFG's exposure to CDOs of asset backed securities stood at $9.2 billion at September 30, 2007. "Fitch believes that a sharp increase in expected losses would be especially problematic for the ratings of financial guarantors exposed to this asset class, including MBIA -- even more problematic than previously discussed increases in 'AAA' capital guidelines," the rating agency said.”
From Barclays: “Credit headlines also remain grim, with Fitch warning that updates to its assumptions for losses on subprime MBS may lead to a downgrade of the bond insurers. A downgrade of financial guarantors would be very problematic for banks, in our view, and likely spur another round of writedowns, potentially necessitating further capital infusions or balance sheet delivering.”
From Bloomberg: [Breaking News] “MBIA TO ISSUE $750 MILLION IN COMMON STOCK”




Rising Unemployment For Self-Employed May Explain Data Discrepancies
From Bloomberg
: “The increase in U.S. unemployment …is being driven by a drop in
the number of people working for themselves, government figures indicate. Hours worked by the self-employed dropped at a 15.5 percent annual pace in the last three months of 2007, the biggest decrease in 15 years, according to data provided …by the Labor Department. The decline ``is probably related to the housing downturn, since one in six workers in construction is self-employed, twice the average for all industries,”… The figures may be another indication of how the deepest real-estate slump in a quarter century is filtering through the economic statistics…The number of people running their own businesses dropped by 365,000 last quarter, compared with the same period in 2006, according to separate Labor Department numbers. The decline in the number of hours worked by the self- employed last quarter reflected a 9 percent annualized drop in employment combined with a 7 percent decrease in average weekly hours for those still with work, the department said. The issue may also help resolve some discrepancies among various labor statistics, economists said. The unemployment rate, calculated from the household survey that covers the self-employed, jumped 0.3 percentage point in December. The increase prompted some economists to predict the U.S. was already, or would soon be, in a recession. Even as the jobless rate rose, revised figures from the
survey of businesses, which doesn't track single-employee companies, showed hiring accelerated on average from the third quarter to the last three months of the year. Payrolls dropped in January for the first time in more than four years…Many mortgage brokers involved in the subprime industry work for themselves…Self-employment may also help explain why first-time applications for jobless benefits have yet to reach levels normally associated with a weakening labor market…Self-employed Americans, although they may file claims, are not eligible for benefits under the unemployment insurance system, according to the Labor Department. ``This could really help explain a lot of the conflicting signals in the data,''…”



MISC



From Merrill Lynch: “After yesterday’s bond rally in the front end, Fed funds futures are now more than 100% priced for a 50 bps ease on 18 March (114% in fact, up from 68% on Tuesday). The market is now close to fully pricing in a 2% Fed funds rate by August.”



From Deutsche Bank: “Given the mounting concerns of an economic recession, the stronger-than-expected productivity figures have a somewhat hollow ring because they came as the result of declining aggregate hours, as opposed to strong output growth. We see the decline in aggregate hours as a negative omen for the labor market, which is worrisome news following a surprisingly weak January employment report and some potential red flags being raised by jobless claims. In fact, aggregate hours were unchanged from year-ago levels…We believe the productivity data further justify the Fed's bias toward downside risks to growth”
From Goldman Sachs: “As helpful as this figure [ULC] is for our contention that labor cost pressures are abating, it's a bit premature to uncork the champagne. The labor cost figures have been subject to enormous revisions in recent years as government officials belatedly discover sharp changes in exercises of stock options, which are counted as part of labor costs. However, with the market going the way it has been lately, maybe the revisions will be more down than up. How's that for a day brightener?”
From Merrill Lynch: “According to the weekly ABC/Washington Post Survey News, the consumer comfort index fell to -33, down six points from the previous week. During the past month, this measure is down 13 points – very recessionary in fact, if you consider that right before the 1990-91 recession the index fell 13 points in four weeks, and slumped by 14 points in the four weeks leading up to the 2001 recession. And keep in mind that this time around the index has slumped in the aftermath of the Fed’s 125 bp rate cut.”



From Deutsche Bank: “Yesterday, the International Council of Shopping Centers reported that total January sales, to be reported tomorrow, are likely to show the worst January performance on record. This new information, in addition to news that January motor vehicle sales fell 6% to 15.2M units, means that we are likely to see negative January retail sales, the second consecutive monthly decline.”
From Lehman: “After surging for the past month, demand for refinancing applications cooled in the week ending February 1. The index of refinancing applications slipped 1%, but given the increase over the previous few weeks, the four-week moving average rose a solid 45% and the y-o-y rate rose 130%. The boom in refinancing has been spurred by lower mortgage rates. The average rate on a 30-yr fixed-rate mortgage fell to a low of 5.50% in mid-January, more than a full percentage point lower than in the summer. However, rates have started to edge higher, reaching 5.61% in the latest week.
The index of purchase applications rose 12%, offsetting part of the decline over the past two weeks. Purchase applications have been little changed over the past year and a half while home sales have fallen sharply, suggesting that applications are a poor indicator of future home sales.”
From Merrill Lynch: “Capital flows have become more significant relative to trade flows in cyclical currency determination. This suggests that currency cycles will be longer, and quite probably of greater amplitude than in the past. We also think that the moves when cycles come to a close could be more violent than in the past…Concern surrounding the upcoming G7 has been affecting FX markets in recent days. We do not believe that any meaningful change to the statement is likely; however the history of these meetings ensure some market nervousness in the lead up.”
From Reuters: “Oil fell to $87 on Wednesday after a larger-than-expected build in U.S. crude stocks and growing fears of a U.S. recession.”
From Bloomberg: “Wheat surged to a record in Chicago, leading other grains and oilseeds higher, on shrinking U.S. and Canadian supplies of high-protein varieties used for bread and pasta. Canada, the largest wheat exporter after the U.S., said yesterday its inventories of the grain plunged by almost a third after adverse weather hurt crops. U.S. spring-wheat inventories will total 88 million bushels on May 31, down 25 percent from a year earlier, according to government forecasts. The jump in grain prices may increase costs for food producers, including Kellogg Co. and General Mills Inc., the largest U.S. cereal makers. It also risks stoking inflation and making it more difficult for central bankers around the world to stave off recession by cutting interest rates.”
From FTN: “Edward Altman, the guru of junk bond analysis, says defaults this year will reach 4.64%, a significant increase over last year’s 0.51% rate. For the most part his analysis consists of tallying up companies already in trouble, meaning the figure is fairly certain to be close to the mark. He says difficulty refinancing is a major issue this year. Or, perhaps it was the ease of refinancing last year which is the problem, because it means trouble was pushed out a year.”
From Bank of America: “The ECB decision to wind down USD liquidity provision to European banks during the month of February (with auctions rolling off February 14 and 28) and subsequent rise in the LIBOR-OIS spread may be contributing to the recent rebound of the USD.”
From JP Morgan: “Charles Plosser, the President of the Philadelphia Fed, defended the Fed's recent rate cuts … while still emphasizing the ultimate importance of price stability for the Fed's macroeconomic mandate….and the importance of anchored inflation expectations….Plosser's forecast: growth in the first half of around 1%, thereafter gradually returning to trend, which he sees as 2.7%. The below trend growth should lift the unemployment rate to 5-1/4%.... On inflation, Plosser expects "little progress to be made in reducing core inflation this year or next, and I am skeptical that slower economic growth will help." He forecasts core inflation to remain in the 2-2.5% range in 2008, "above the range I consider to be consistent with price stability."… On the policy outlook, Plosser did not go as far as Lacker and say that further easing may be warranted. Instead, he noted that policy rates should be lowered only when data is weaker than expected, and his outlook has already factored in weak data.”
From Handelsbanken: “Positive earnings surprises have started to outnumber negative reports, and if you exclude financial companies, a full 66.4% of the companies already reported have beat analyst expectations prior to the beginning of reporting season. This constructive earnings result is even more surprising in that a healthy cross section of sectors and industries have contributed to the positive earnings developments.”



End-of-Day Market Update
From RBSGC
: “[Treasury] Prices didn't do much of anything on Wednesday, but rather held to the middle of a fairly tight range. The takeaway is that the recent strength is undergoing consolidation, not rejection, which tempers our bearishness and puts us more in a range-trading frame of mind. That said, within the boundaries of a range the market has an somewhat improving tone raising the risk of a move higher… Softer stocks certainly contributed to the bond market's hold/bounce of the intra-day lows.”
From Bloomberg: “Treasuries fell as the government sold $13 billion of 10-year notes at the lowest yield since regular quarterly auctions of the securities began 30 years ago. Ten-year Treasuries reversed most of a rally from yesterday as traders bet that interest-rate cuts by the Federal Reserve will revive growth and spark inflation later this year. Two-year note yields were the furthest below 10-year note yields since 2004, indicating traders expect the central bank to add to its five rate reductions since September to support the economy. ``As the next few cuts come, long-term rates will rise as opposed to falling,'' … ``The steepness of the yield curve shows you the market is concerned about inflation.''”
From Bloomberg: “U.S. stocks fell for a third day, led by energy producers and retailers, after oil prices dropped and a reduced earnings forecast at Macy's Inc. spurred concern the housing slump is spreading through the economy. The Standard & Poor's 500 Index erased a gain of as much as 1.2 percent after Macy's said it will cut 2,300 jobs, sending chain-store shares to their steepest three-day drop in five years. Chevron Corp., the second-biggest U.S. oil company, retreated to a nine-month low as oil declined by more than $1 a barrel. Micron Technology Inc., the largest U.S. maker of memory chips, fell the most since October 2006 after an analyst said computer companies have stockpiles of unused parts. The S&P 500 lost 10.19 points, or 0.8 percent, to 1,326.45. The Dow Jones Industrial Average declined 65.03, or 0.5 percent, to 12,200.1. The Nasdaq Composite Index decreased 30.82, or 1.3 percent, to 2,278.75. More than two stocks fell for every one that rose on the New York Stock Exchange.”
Three month T-Bill yield fell 7 bp to 2.08%.
Two year T-Note yield rose 2 bp to 1.94%
Ten year T-Note yield rose 2.5 bp to 3.60%
Dow fell 65 to 12,200
S&P 500 fell 10 to 1326.5
Dollar index rose .05 to 76.16
Yen at 106.7 per dollar
Euro at 1.462
Gold rose 12 to $900
Oil fell $1.34 to $87.07
*All prices as of 4:37pm


S&P500

10Yr-Treasury Note


3m T-Bill Yield

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