From JPMorgan: “Peak-to-current home price decline reached -25.49% in September. We maintain our projection of -35% peak-to-trough decline and expect to see a bottom in early 2010. Given the October-November meltdown in markets, risks to price declines of -40% or greater have increased substantially…California experienced the biggest price decline of -28.91% annualized in August. The 12-month decline was -29.85% and the drop from the peak is now at -39.87%. There is little evidence of a slowdown in California home price depreciation; the 1-month decline is more severe than the 12-month for a number of metro areas, including San Francisco and San Diego. Unprecedented levels of REO inventories and liquidations in the housing market are, at this point, only a question of when they will happen, not if. Applying our analysis of default timing, we project a rough total of 7 million defaults flooding the housing market,
with the volume peaking in 2010. We expect this large liquidation volume will cause the housing market to hover around the bottom for a number of months or even years, rather than take a strong bounce off the bottom.”
From Reuters: “…U.S. existing home sales indicate there are about 1 million extra homes that can’t be sold. Defaults and delinquencies for home loans continue to climb, adding to the 6.9 million foreclosures over the past three years.”
New Pension Rules Hitting Companies at a Bad Time
From Financial Week: “By the time Mr. Obama assumes office in January, scores of corporations will likely be burdened with significantly underfunded pension plans. And, just as major losses in the equity markets sucked assets out of pension plans over the past 10 months, relatively new pension rules have the potential to drain billions from corporations' coffers next year… employers could be on the hook for up to $150 billion in pension contributions in 2009—triple the $50 billion in contributions companies will make this year. “Companies have already been forced to tap into their cash this year for basic business purposes, like making payroll,” … “With eroding cash positions, and very little access to credit, companies will be forced to fund their pensions by cutting their operations and work forces—and that clearly was not the intention of these new funding requirements.” The new funding rules, which were included in the Pension Protection Act of 2006 and went into effect this year, require companies with underfunded plans to make larger, more aggressive contributions to quickly get their pensions 100% funded (the previous target was only 90%). There was also a provision to force companies to freeze their pension plans if funding levels fall below 60%. “That's the double whammy,” … “At the same time people could be losing their jobs because their companies are forced to make cutbacks, workers' retirements could be compromised too…contributions appear as if they could be significantly more than many companies were figuring earlier this year. Consulting firm Watson Wyatt gathered data from 28 corporate clients, who estimate that their aggregate required pension contributions will be $2.1 billion—181% higher than those companies had previously budgeted. “You can make a reasonable argument that these kinds of unexpected increases couldn't come at a worse time for corporations,””
Foreclosure and REO Update
From LEHC: “RealtyTrac today released its October 2008 U.S. Foreclosure Market Report today, which showed that foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 279,561 U.S. properties last month, a 5% increase from September and a 25% increase from October 2007. October’s monthly increase came despite an 18% drop in California related to recent legislative actions. REO properties acquired by lenders were up by 4.4% from September – despite a 24.6% decline in California – and up by 58.3% from a year ago. REO properties acquired ex California in October were up 26.6% from September, with the biggest absolute gains coming in Arizona, Florida, and Georgia. RealtyTrac reported that the top ten states in terms of foreclosure filings per household were Nevada, Arizona, Florida, California, Colorado, Georgia, Michigan, New Jersey, Illinois, and Ohio. The metro areas with the highest foreclosure filings per household were Las Vegas, Cape Coral-Fort Myers, Miami, Stockton, Merced, and Riverside-San Bernardino.
MISC
From JPMorgan: “Treasury purchases of mtges were $21.5bb in October … The $21.5bb number is more or less what we anticipated, so the mtge mkt has not really reacted to the news. I do think it's noteworthy that $21.5bb represents ~75% of net issuance for the month”
From CITI: “The amount of Treasury issuance necessary to fund the various governmental programs already announced, the 2009 budget deficit, and the additional fiscal stimulus is mind-boggling. The tremendous size of the anticipated increase in Treasury issuance begs the question: Can the existing Treasury investor base handle the huge uptick in Treasury supply without significant disruption? If not, then the market needs to consider and prepare for the consequences of this Treasury tsunami well in advance of its appearance.”
From Merrill Lynch: “Intraday today, the dividend yield on the S&P 500 was higher than the 10-year T-Note yield (3.74% vs. 3.71%). By our reckoning, this is the first time the S&P 500's dividend yield has been higher than the 10-year T-Note yield since 1958.”
From Deutsche Bank: “The rise in this series [continuing claims] tells us that once workers are laid off, they are having tremendous difficulty obtaining employment. This does not bode well for future income prospects and is one reason why we are projecting an unprecedented slowdown in consumer spending in this cycle compared to the post-WWII period.”
From The Financial Times: “Writedowns by Fannie Mae, the US mortgage financier that was nationalised this year and AIG, the insurer that has twice been bailed out by the US government, have lifted total losses reported by financial institutions since the beginning of 2007 to $918bn, according to data compiled by Bloomberg.”
From CITI: “The next shoe to drop are the insurance companies- look for them to clamor for conservatorship. Why? They are the biggest holders of bad assets and cannot become bank holding companies to get government protection.”
From Reuters: “Credit losses from the financial crisis may exceed even dire estimates of $1.4 trillion, or more than 10% of U.S. economic output, according to the chief strategist of research firm CreditSights.”
From Bank of America: “A commodity-led fall in inflation ought to be good news for rich economies. It boosts consumers' real incomes and fattens firms' profit margins. Yet there is something pernicious about inflation falling too far, too fast. Because falling prices make debt more expensive, indebted households would be more anxious to pay off loans, even as other consumers were benefiting from a boost to their purchasing power. If deflation took hold, the gap in demand left by those fleeing debt would not be filled by cash-rich consumers, who tend to be less free-spending.”
From Bloomberg: “JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. are among banks that told the government its program to back their bonds is flawed because it doesn't have a strong enough guarantee. The Federal Deposit Insurance Corp. guarantee for repayments in default needs to be clearer, fees are too high and banks need more freedom on whether to opt in, according to a letter from law firm Sullivan & Cromwell LLP posted on the agency's Web site on behalf of nine banks. The comment period on the interim rules for the FDIC's Temporary Liquidity Guarantee Program ends today. The comments shed light on why almost a month after the government placed its guarantee behind new bank bonds, no U.S. company has yet tested the market.”
From CNN: “The head of the Senate Banking Committee Thursday said banks receiving money as part of the $700 billion federal bailout must step up their lending to consumers and businesses. Banks are failing to use public funds to make credit more available and to help troubled homeowners, said Sen. Christopher Dodd, D-Conn. Congress did not pass the bailout plan so banks could hoard the money or use it to scoop up faltering rivals, he said. "We want to see more progress from our friends in the financial sector -- more progress in foreclosure mitigation, in affordable lending, and in curbing excessive compensation," Dodd said. "And if that progress is not forthcoming, we are prepared to legislate." Lawmakers on both sides of the aisle have been critical of the Treasury Department's implementation of the bailout of the financial sector.”
From Bloomberg: “President George W. Bush today urged leaders of the world's biggest economies not to abandon free- market capitalism as they seek an escape from the financial crisis, calling it the ``best system'' for delivering growth…Bush said policy makers should resist the urge to meddle too much in markets as they seek to reverse the financial and economic turmoil now engulfing the world. ``History has shown that the greater threat to economic prosperity is not too little government involvement in the market, but too much,'' Bush said. ``Our aim should not be more government, it should be smarter government.''”
From Barclays: “Commercial paper outstanding rose just $2.9bn in the week ending
November 12 after surging $150bn over the prior two weeks, suggesting that the demand for funding through the Fed's commercial paper funding facility (CPFF) waned in the near term. Financial CP actually fell $15.7bn and was more than offset by a $9.2bn increase in asset-backed paper and a $9.4bn rise in non-financial CP. Yields moved lower across most types and terms of CP over the week, as did spreads over effective fed funds. The week's results may suggest that some of the pent-up demand for term funding through the CPFF has eased and outstanding CP will increase more incrementally.”
End of Day
From Bloomberg: “U.S. stocks staged a late-day rally to climb the most in two weeks as investors snapped up the cheapest energy shares on record and real-estate companies gained after CB Richard Ellis Inc. raised cash in a share sale. Exxon Mobil Corp. and Chevron Corp. led gains in all 40 energy producers in the Standard & Poor's 500 Index and helped the Dow Jones Industrial Average rebound from a 317-point drop. CB Richard Ellis, the world's largest provider of commercial real-estate services, surged 43 percent for its steepest advance since going public in 2004. Declines in midday trading today pushed the S&P 500 to 35 percent below its average for the past 200 days, only the second time that's happened since the Great Depression. The last time was a day before the index rose 12 percent on Oct. 13, the biggest rally since 1939. ``Bottom line, stocks are incredibly cheap,'' … ``Volatility accelerates when markets reach bottoms…The S&P 500 added 6.9 percent to 911.29, reversing a slide of 3.9 percent. The Dow increased 552.59 points, or 6.7 percent, to 8,835.25. The Nasdaq Composite Index jumped 6.5 percent to 1,596.7. More than 14 stocks rose for each that fell on the New York Stock Exchange, where almost 2 billion shares changed hands in the busiest trading session since Oct. 16. The S&P 500 swung between gains and losses at least 38 times, including a drop that sent the benchmark index to its lowest level since the Iraq War broke out 5 ½ years ago. Europe's benchmark index fell 0.6 percent, led by banks and commodity producers, as Germany sank into recession and the OECD forecast a global economic slump. Asia's regional benchmark slid 4.8 percent after Commonwealth Bank of Australia said bad debts may double and China's industrial output missed estimates. The MSCI Emerging Markets Index lost 1.3 percent, extending its three-day slide to almost 10 percent.”
From RBSGC: “Treasuries ended the day lower with a decidedly steeper curve. The 30-year sector was appropriately weighed on by the 9.5 bp tail for the 30-year Reopening auction -- this also dragged the rest of the long-end lower. The front-end and belly carried a solid bid throughout much of the session -- owing primarily to the attempts of the stock market to crack lower. In the end however, stocks caught a bid -- firming off the lows and the strength reversed the flight-to-quality support for 2s and 5s.”
From UBS: “Full Moon Doesn't Disappoint…UST 2-year notes traded at a cycle low today of 1.136%, a mere 8 bps off the generational lows of 1.056% seen on June 13, 2003. Yields rose over the course of the afternoon as the equity market got its footing and rallied after it, too, set new lows for the move. The high and low point of the day occurred coincident with the 1:00 hour. Conspiracy theorists might draw some conclusions from the fact that stocks started their last swoon down around 12:45 and then touched bottom just as the bids were due for the $10B UST 30- year auction. The auction was sloppy for the Treasury, but a Dutch treat for the bidders. The issue tailed 9 bps from the 1:00 yield (1 18/32nds), with a cover of 2.07x, a stop of 4.31% (83.20%), and 18.2% indirect bidders. The long dated supply combined with the nice bounce in equities facilitated a steepening of the US2Y10Y curve by 11 bps to 260 bps. The CRB was +2.19 to 27.63. Oil rallied $2.91 and settled at $59.94/bbl. Stocks had an interesting trade with a new low and a solid price move higher, closing near the day's highs +553 to 8.835. Treasury volume was at the 30 day moving average, the first time this has occurred since September 19th…. The Trade Deficit was less than the number used by Commerce in its Advance Q3 GDP report, so our running revision of GDP is now -0.7% from the original -0.3% … Spreads a Sideshow to Equities and the Auction: Spreads were unsettled today as the market continued to digest the fact that Paulson was no longer planning to use the TARP to bid for distressed assets. The reality is that the idea was too complicated to structure and implement with only about two months of holiday abbreviated time until the Obama team takes over. Why saddle the new administration with a complicated and untested concept… Intraday the 10- year spreads hit a cycle low of 26.75 bps. Vol traded higher in line with the rate and spread moves to cycle lows. The correlation with the steepening curve remains intact. The VIX did not set a new high as the stock market plumbed new lows. Another divergence which we have noted (along with the RSI).”
Prices as of 4:45PM (Based on Bloomberg)
Three month T-Bill yield rose 5 bp to 0.19%
Two year T-Note rose 8 bp to 1.24%
Ten year T-Note yield rose 14 bp to 3.87%
30-year FNMA current coupon rose 13 bp to 5.59%
Dow rose 553 points to 8835
S&P rose 59 points to 911
Dollar index fell 0.53 points to 86.94
Yen at 97.7
Euro at 1.28
Gold rose $24 to $736
Oil rose $3.25 to $59.4
S&P Trading Today
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