Thursday, July 31, 2008

Interesting take on inflation by Jeff Rubin

Jeff Rubin, CIBC World Markets Chief Economist discusses why he feels we will see a 6% inflation rate soon. His argument, "this labor outsourcing story to the cheap labor markets in Asia is over" thanks to triple-digit oil prices. The result will be even higher prices. He also asks, "how much longer can the fed funds rate remain where it is when inflation is at 6%?"

click for video

source: 6% inflation ahead?
Jeff Rubin on Fox business news

EURUSD speculative sentiment net long

Retail sentiment has once again shifted; and this time, speculative traders are positioning for the EURUSD’s long-term trend to remain intact. Over the past week, the Speculative Sentiment Index ratio jumped to its highest reading since last October - though this shouldn’t be too surprising considering the retail sector’s affinity for prominent technical levels. Today, the pair’s ratio stands at 1.59 with nearly 61% of the market group holding a long position.

click to enlarge

source: Rising Long Interest Threatens A Euro Breakdown

Wednesday, July 30, 2008

State of the housing market - another fascinating chart

How delinquency rates and home prices have changed in 200 U.S. metropolitan areas in the move from boom to bust.
click for interactive chart (or link below)

source: Shrinking Prices, Rising Delinquencies


Housing inventory is the key to recovery

This very interesting chart comes from the WSJ and highlights the current plague that torments the housing market in the U.S. While there are some improvements in unsold housing inventory in certain metro areas (" of homes listed for sale declined from a year earlier in 19 of 28) others continue to pile on in part due to a growing glut of foreclosed homes. According to Barclays there are about 721,000 foreclosed homes on the market nationwide, up from 112,000 two years ago.

From the WSJ:
Housing markets generally are considered roughly in balance when the number of homes listed for sale is enough to last about six months at the current sales rate. Based on the average sales rate over the past year, The Wall Street Journal survey shows that supplies are enough to last about 13 months in the Atlanta and Phoenix areas, 15 months in Chicago, 19 months in Las Vegas, and 37 months in Miami-Fort Lauderdale. For condominiums alone in Miami-Dade County, the supply is enough to last 51 months.

click for interactive graphic (problems click link above)

source: Amid Housing Slump, Glut Eases Slightly

By JAMES R. HAGERTY, July 29, 2008; WSJ

Monday, July 28, 2008

David Simon of Simon Property: worst of the economic downturn in 2009

Simon Property Group, a real estate investment trust (REIT), that owns real estate properties primarily of regional malls, Premium Outlet centers, The Mills, and community/lifestyle centers in the U.S. and abroad (Europe, China, Japan) announced second quarter FFO topping Wall Street expectations. Despite the good results occupancy rates in the mall portfolio was down during the quarter. CEO David Simon sees the worst of the economic slowdown manifest in 2009.

Here is what David Simon, Chairman and Chief Executive Officer had to say during the call:
Occupancy in the mall portfolio was down 20 basis points as compared with the year earlier period. Square footage lost to bankruptcy for the first six months of 2008 totaled 151,000 square feet as compared to 30,000 square feet during the first six months of 2007.

As we discussed in the first quarter, the decline in the premium outlet occupancy is primarily due to lease terminations or bankruptcies of four tenants comprising about a dozen spaces and the late March 2008 openings of Houston premium outlets and Phase 2 of Rio Grande premium outlets, we expect occupancy within the premium outlet portfolio to return to previous levels.

David Simon
I’d just, Paul, though, it is, we’re going to have more store closings in ’08 and in ’09 than we did in ’06 and ’07. I mean there’s no ambiguity about that. Now again, we still think the way we operate and the way we’ll still be bale to grow our cash flow, but we’re going to deal with more store closings in ’08 and ’09 than what we have at least in the last couple years.

Now the one thing I will say at this point, the cycle that we’re in doesn’t feel like or seem like anything different from a retail perspective that we haven’t already dealt with previously unfortunately numerous times. So at this point, it feels like/seems like kind of something we’ve done. I’d say a déjà vu all over again, but we’ve seen it.

David Simon:
Well, I think it’s tough because we’re I think kind of in the… We’re in the first half of the downturn let’s say, okay. It’s a very tough judgmental call. I do think we’ll see the worst of it manifest itself in ’09, not ’10. But a lot of the story hasn’t been written and clearly the trend of better properties getting better and worse properties getting worse is only going to accelerate in a tough economic environment.

source: Simon Property Group, Inc. Q2 2008 Earnings Call Transcript

Seeking Alpha

Manhattan real estate prices

This map of Manhattan real estate prices comes from The Daily Chart blog.
click to enlarge

source: The Daily Chart
Trulia (Home)
Posted by Cranky at 10:55 PM

Bill Gross IO for August 2008 - inflation/deflation conundrum and home prices

Bill Gross' new IO for August as always is a joy to read and again he hits the nail on the head. This time he tackles the risk for asset price deflation which in his opinion rests entirely with home prices. "Let's blame it on the barn, or if you must, home prices." Falling home prices put some 25 million homes, purchased in 2004 and beyond, at risk for negative equity which could eventually lead to a cumulative loss of 1 trillion dollars on the balance sheets of financial institutions according to Gross. If not matched by raising capital that loss necessitates a sale of assets and a general reduction of lending. There you have it "deflation", but to be sure we are not there yet. Capital raising so far has been very succesfull and the world is still awash in cash. Not all financial institutions have entirely lost its earnings prowess or so it seems. Last weeks gains in stock indeces was in part due to better than expected earnings for the second quarter from some of the major financial institutions in the U.S. C&I loans and consumer loans at US financial institutions are still growing according to data from the Federal Reserve Bank of St.Louis. All this for the moment argues against a major asset price deflation threat but if home prices continue to slide this possibility might become the next nightmarish reality and this time for the real economy.

Bill Gross' Mooooooo:
An asset deflation in turn becomes a debt deflation, as subprimes, alt-As, and finally prime mortgages surrender to the seemingly inevitable tide. PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble. The problem with writing off 1 trillion dollars from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth, creating what Mohamed El-Erian fears as a “negative feedback loop.”

Financial asset prices, as well as those for homes, are really the discounted present value of what investors believe those assets will be worth far into the future. When the discount rate – in this case a 30-year mortgage – rises faster than the expectations for home prices themselves – then the price of a home falls. 7% + “all in” yields for current home financing, in contrast to prior periods of monetary easing, are lowering, not raising the discounted present value of an existing home. Blow them up? Well, yes, I suppose if we could. But absent that, lowering the cost of mortgage credit via the omnibus housing/GSE bill now placed before the Congress and the President is the best way to begin the long journey back to normalcy.

To return the housing, cow milking, asset price deflating metaphor to its broader context, the increasing price of credit is a common denominator worldwide in the delevering process which it drives, or in turn, is driven by. If the cost of credit – the discount rate for present value – would go down, then asset prices would be better supported. Stocks wouldn’t sink so fast, commercial real estate wouldn’t wobble so, ..But the cost of credit is going up, not down, in contrast to prior cycles, because astute investors recognize the myriad of global imbalances that threaten future stability. In addition to home prices, $130 a barrel oil and their resultant distortion of global wealth and financial flows head that list. For now, investors should remain in high quality assets – until – until, well…until the prospect for home prices points skyward or until the cows come home, whichever one’s first.

source: Mooooooo!
Investment Outlook, Bill Gross | August 2008

read also: Consumer loans and C&I loans at commercial banks are still growing
Wednesday, July 16, 2008

U.S. projects record budget deficit for 2009

AP reports a budget deficit for 2009 approaching $490 billion. That is the largest deficit on record after the U.S. government inherited a record budget surplus in 2000. Bill Gross in his July IO projected an all time budget deficit record of $1 trillion for the next government.

From the AP:
In fact, the White House had included cost estimates for an economic stimulus bill in its earlier projections, so the new figures represent a considerable deterioration in the government's fiscal health.

The White House had predicted in February that next year's deficit at $407 billion, which means the increase in the projections since then would approach $80 billion or so. Figures for the 2008 budget year ending Sept. 30 may also set a record.

The numbers represent about 3 percent of the size of the economy, which is the deficit measure seen as most relevant by economists. That's considerably smaller than the deficits of the 1980s and early 1990s, when Congress and earlier administrations cobbled together politically painful deficit-reduction packages.

Still, the new figures are so eye-popping in dollar terms that it may restrain the appetite of the next president to add to it with expensive spending programs or new tax cuts. In fact, pressure may build to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled at the end of 2010, with Congress also feeling pressure to curb spending growth.

The deficit for 2007 totaled $161.5 billion, which represented the lowest amount of red ink since an imbalance of $159 billion in 2002. The 2002 performance marked the first budget deficit after four consecutive years of budget surpluses.

source: Bush administration projects record 2009 deficit
AP, Monday July 28,

read also: Bill Gross sends letter to the future President
Tuesday, July 1, 2008

Thursday, July 24, 2008

Germany Ifo business climate worsenes in July 2008

From the survey:
The Ifo Business Climate Index for industry and trade in Germany has fallen again significantly in July following a clear worsening in the previous month. The firms are much more dissatisfied with their current business situation and they are clearly more reserved regarding the six-month outlook. These results suggest that the economic upswing is coming to an end.

click to enlarge

source: Ifo Business Climate Index Falls

Ifo Business Survey July 2008

Wednesday, July 23, 2008

Arrear rates 2.5x higher on US subprime than British buy-to-let

Bradford & Bingley, the beleaguered British buy-to-let mortgage lender( British version of subprime), has successfully raised about $5 billion in its first securitization of the year. B&B has bought parts of GMAC's U.S. mortgage book last year and is now faced with loan losses from its own book and that of GMAC's. This new securitization is good news after a credit rating downgrade earlier this month to just two notches above junk.

In an interesting remark The Daily Telegraph cites arrear rates for both the U.S. GMAC book and B&B's origianted loans. Based on the assumption that GMAC's mortgage book is purely U.S. domestic (I can not confirm this at this point!) it appears that arrear rates are 2.5 times more frequent than B&B's originated loans.

The arrears rates on the GMAC book, from which it is obliged to buy £350m of mortgages every three months until 2009, are running at 5pc, against 1.9pc of the loans B&B originated itself.

source: Bradford & Bingley's £2.5bn deal proves ability to access funding
By Philip Aldrick, The Daily Telegraph

Tuesday, July 22, 2008

How did the major stock indices perform since August of last year?

click to enlarge

Plosser speech on the outlook for the U.S. economy and inflation

Charles Plosser, President of the Philly Fed, delivers a speech about his outlook for the economy and inflation. It is interesting to see that not everyone at the Board of Fed Governors is compromised by unflinching support for ailing Wall Street.

on inflation:
The consequence of our easing of monetary policy is that the inflation-adjusted — or real — interest rate on federal funds is now negative — between minus 1 percent and minus 2 percent. The last time we saw such a negative real fed funds rate was in 2003-2004. But the environment then was much different than it is now. Back then, the Fed was concerned about the threat of deflation. Today, as we all know, this is not the case. Many of us are concerned about rising inflation rates.

Keeping policy too accommodative for too long worsens our inflation problem. Inflation is already too high and inconsistent with our goal of — and responsibility to ensure — price stability. We will need to reverse course — the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later. And I believe it will likely need to begin before either the labor market or the financial markets have completely turned around.

I want to make clear that the rise in inflation expectations in the 1970s was not caused by a wage-price spiral. That story has things backwards. The wage-price spiral was a consequence of the inflation and the unanchoring of expectations of inflation, not the other way around. And the unanchoring of inflation expectations was caused by the public’s loss of confidence in the Federal Reserve’s resolve to bring inflation back down. The credibility of the Fed’s promise to deliver price stability was lost.

In recent months I have heard some analysts suggest that the current economic situation is not like the 1970s because unions are less prevalent and there is no evidence as yet of a wage-price spiral. Thus, a weak economy, with rising unemployment and declining payroll employment, will presumably prevent workers from demanding higher wages. But, again, that story has things backwards. It is not demands for higher wages that kick off the spiral, but the loss of confidence that the central bank will keep inflation controlled, which, in turn, leads to a rise in inflation expectations. The wage-price spiral is not the cause of the inflation, but the result.

I want to emphasize that what we have been seeing in the economy this past year, and in my own outlook going forward, is very different from the 1970s, because I see the Fed as committed to keeping inflation expectations well-anchored. I agree with a statement Fed Chairman Bernanke made in June that the Fed will strongly resist an erosion of longer-term inflation expectations, because an “unanchoring” of those expectations would be destabilizing for economic growth as well as inflation.

Since energy price increases have been so persistent in recent years, I do believe more attention should now be paid to measures of headline inflation in setting monetary policy. I don’t believe we can be sanguine that the behavior of core inflation will keep the public’s inflation expectations well-anchored in the face of persistently high headline inflation. To keep inflation expectations anchored means that monetary policymakers will have to back up their words with action.

source: Perspectives on the Economy, Inflation, and Monetary Policy
Presented by Charles I. Plosser,
President and Chief Executive Officer, Federal Reserve Bank of Philadelphia

Friday, July 18, 2008

EA May 2008 preliminary trade deficit: 4.6 bn euro

The EU released its preliminary trade data for May 2008:
The first estimate for the euro area1 (EA15) trade balance with the rest of the world in May 2008 gave a 4.6 bn euro deficit, compared with +1.4 bn in May 2007. The April 20082 balance was +2.5 bn, compared with +2.0 bn in April 2007. In May 2008 compared with April 2008, seasonally adjusted exports fell by 3.4% and imports by 1.3%.
The first estimate for the May 2008 extra-EU271 trade balance was a deficit of 21.5 bn euro, compared with -14.7 bn in May 2007. In April 20082, the balance was -15.4 bn, compared with -12.9 bn in April 2007. In May 2008 compared with April 2008, seasonally adjusted exports fell by 4.0% and imports by 1.3%.
click to enlarge

source: Euro area external trade deficit 4.6 bn euro, 21.5 bn euro deficit for EU27
Eurostat, May 2008

read also: EA April 2008 preliminary trade surplus: 2.3 bn euro
Wednesday, June 18, 2008

Are we in a recession yet?

Citi says yes, at least according to credit trends in their NA card business.

click to enlarge

Citis's second quarter better than feared

Citi's second quarter earnings results were bad but not as bad as expected. NA Consumer banking in res. real estate net credit losses were $1.09 billion up from $216 million a year ago. Loans 90+ DPD were at $6.46 billion up from $2.91 billion a year ago (loan losses are also higher sequentially). CRE loans net credit losses were only $16 million, 33% lower than a year ago. Auto loan delinquencies (90+ DPD) were 51% higher at $265 million compared to $176 million a year ago. Net credit losses at Personal loans & other were 63% higher at $444 million from $273 million a year ago (credit losses in this category are also up sequentially). Loan delinquencies in this category are 45% higher compared to a year ago.
click to enlarge

Consumer loan delinquencies by region were at $9.03 billion (2.43% ratio) in NA and $840 million (1.17% ratio) in EMEA (Europe, Middle East and Africa). Net credit losses were at $2.45 billion (2.55% ratio) and $431 million (2.49% ratio) in NA and EMEA respectively. The biggest contributor was consumer banking with net credit losses of $1.76 billion (2.33% ratio) and $266 million (2.51% ratio) in NA and EMEA respectively. Global Cards net credit loss ratio was 6.46% or $687 million in NA and only 3.9% or $166 million in EMEA.

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Institutional clients group (ICG) saw debt underwriting reporting a loss of $277 million substantially less than $2.08 billion loss reported in the first quarter of 2008. Fixed income reported a loss of $633 million that is substantially less than $7.023 billion in the first quarter of 2008 and $16.105 billion loss reported in the fourth quarter of 2007. Write-downs in the fixed income segment were $3.4 billion on subprime related direct exposure, $2.4 billion related to exposure of monolines and an additional write down of $0.5 billion on CRE positions. Off setting the steep write-downs were record revenues in interest rates, currency and commodities, mainly oil, the company stated during the conference call.
click to enlarge

Fixed income reported a loss of only $633 million despite a combined write-down in this segment of $6.3 billion! underscoring the off setting effect of commodities trading. This is a direct result of an accommodative Federal Reserve, and there is little hope for change as long as this dynamic of massive loan corrections continues. This is my base case for higher commodity prices over the near to medium term.

source: Second Quarter 2008 Earnings Review

Citi, July 18, 2008

Thursday, July 17, 2008

Euro fails to take 1.60 - extreme SSI eases

EURUSD – Speculative positioning in EURUSD normalized after a significant dollar rebound marked the end of a dramatic run on 1.60. Since last Friday – when the Speculative Sentiment Index Ratio hit a near 10-month low -3.17 – the pair’s bullish advance was steadily tempered with the extreme sentiment reading capitulating. Today, the euro’s SSI reading stands at -1.39 with 58% of the group short. This reading happens to sustain a steadily diminishing, weekly trend following the -1.71 figure from last Thursday and the -2.48 print from two week’s ago. The indicator’s details confirm the ratio’s move back to parity. Long positions were a modest 0.5% weaker than yesterday, but a significant 26.6% stronger than last week. Showing the lack of interest in the pull back, shorts were only 0.6% above Wednesday’s levels and 6.6% weaker than last Thursday. Overall, the dramatic price action hasn’t drawn many volatility seekers as open interest has grown only 4.3% over the week and now stands 3.1% above the monthly average.

click to enlarge

source: Euro SSI Extreme Eases After The Currency Fails To Take 1.60, Thursday, 17 July 2008

Wednesday, July 16, 2008

The dollar-crude arbitrage trade

Bernanke under oath testified before Congress that in his opinion the high price of oil is caused by supply and demand. The extend to which the value of the U.S. dollar influences the price of oil is highly complex and difficult to understand, so he sayed. Well Mr. Bernanke let me help you out. As the chart below shows the price of oil fell 10 percent in the last 48 hours in two separate five minute episodes. This resulted in a decline of the NYMEX CL August08 forward contract from peak ($146.73) to trough ($132.0) of $14.73. At the same time the EUR/USD cash contract declined from 1.6018 to 1.5897 between 10:00 and 11:20 a.m. on Tuesday and from 1.5890 to 1.5816 between 10:30 and 10:50 a.m. on Wednesday. As the chart below demonstrates a gain of 102 bp or 0.64% of the USD perfectly matched with the decline in the NYMEX CL August08 forward contract for crude oil.

The reason why crude oil future contracts plunged 10 percent are somewhat elusive but option expiration at the August 2008 contract on Thursday July 17 may have played a role. In addition the actual August future contract is about to expire on Tuesday July 22. The reasons for the concomitant decline in the U.S. dollar are less nebulous. It is simply the fact of an arbitrage trade or otherwise known as a "riskless profit" trade that is in play here. In other words being long crude oil and short the dollar is part of a speculation holiday for most trading desks on Wall Street. Mr. Bernanke if you and your colleagues could bring yourself to support the nations currency not only with lip service but with real action in form of a substantially higher fed funds rate, more inline with your real mandate, I predict oil prices would come down to $70 within a matter of weeks.

click to enlarge

U.S. industrial production advanced 0.5 percent in June 2008

The chart below speaks for itself. There is not much to add to it other than CapUt is down at the primary, semi-finished and finished processing level and up only on the crude processing level. In our opinion this is a direct result of high oil prices and not of a marked slowdown in the economy. A good example is Andrew Liveris, Dow Chemical CEO, who is ideling capacity in his plants to cover cash costs. On June 24 he said on CNBC:

"When you can't run the plant to make policy of cash costs you just have to bring it down. Let's call it managing the assets so we don't make negative margins. We are trying to maintain our earnings."

Indeed, the economy is barely slowing down (see Brian Wesbury yesterday), as seen in IP data for non-durable consumer goods, business equipment and non-energy industrial materials which are still up 10% to 30% respectively from their 2002 base levels.

from the release:

Industrial production advanced 0.5 percent in June after having fallen 0.2 percent in May. Industrial production for the second quarter as a whole dropped 3.1 percent (annual rate) from the first quarter. Manufacturing output gained 0.2 percent in June and was boosted by a jump of 5.4 percent in the output of motor vehicles and parts; activity resumed at motor vehicle parts and assembly plants that had been idled by a strike that began in late February and ended in late May. Excluding motor vehicles and parts, factory output edged down 0.1 percent. Outside of manufacturing, the output at mines increased 1.1 percent, and the output at utilities was up 2.1 percent. At 111.7 percent of its 2002 average, total industrial production was 0.3 percent above its level of a year earlier. In June, the capacity utilization rate for total industry moved up to 79.9 percent, a level 1.1 percentage points below its average for 1972-2007.

click to enlarge


Federal Reserve Statistical Release G.17

read also: Wesbury sees close to four percent growth in the second quarter
Tuesday, July 15, 2008

read also: The rude cause of inflation raises the specter of recession
Tuesday, June 24, 2008

Consumer loans and C&I loans at commercial banks are still growing

One of the main arguments in the corner of the deflationistas is restricted supply of credit to industry and consumers. The most extreme call this period "peak credit". The culprits for that alleged credit crunch are the recent multi billion dollar losses at financial institutions world wide and their supposedly depleted capital base.

The Federal Reserve bank of St.Louis releases timely data (on a monthly and weekly bases) concerning the amount of credits loaned out from U.S. commercial banks in the form of H.8 assets and liabilities of commercial banks. On that level it should surprise at least those on the deflation train to learn that C&I loans reported on a weekly basis are still growing at a $110 billion to $140 billion range compared to a year ago. The most recent weekly data (July 2, 2008) for that loan group are growing close to $120 billion compared to the a year ago (see right side panel of chart 1).

chart 1, click to enlarge

A similar scenario is being played out for another important loan group. Consumer loans from all commercial banks recorded on a monthly basis are still growing by about $65 billion dollar by June 1, 2008 compared to the same month last year (see left hand panel on chart 2). That is close to a record and up from about $20 billion at the beginning of the credit crises.

Not surprisingly another loan group, real estate loans at all commercial banks, continues its decline. On a monthly basis the growth rate was $180 billion on June 1, 2008 compared to last year. That is down significantly from a peak of about $450 billion at the beginning of 2007 (see right hand panel of chart 2 and chart 3). This is hardly surprising given the state of the housing market and the persistent failure of the securitization market. We will not expect significant recovery in this loan group for the foreseeable future. Even with real interest rates being negative we have not seen mortgage rates coming down, to the contrary are going higher, mainly because of the problems in the secondary mortgage market.
chart 2, click to enlarge

At this time so called "peak credit" is only obvious in real estate loans. The deflation scenario is not applicable to the rest of the economy as this data series clearly demonstrates. The loss of about $300 billion in total loan growth and investments at all commercial banks from the beginning of this year to June 1, 2008 compared to the same time period last year can be attributed primarily to the loss in real estate loans (see chart 3).
chart 3, click to enlarge

Moreover Jean-Claude Trichet, President of the ECB, said the following at his latest policy statement on June 5 2008:

However, the growth of loans to non-financial corporations has remained very robust. While some moderation can be expected in the future in the light of tightening financing conditions and slower economic growth, bank borrowing by euro area non-financial corporations grew at an annual rate of 14.9% in April 2008, and the flow of loans in recent months has been strong.

source: Release: H.8 Assets and Liabilities of Commercial Banks in the United States

The Federal Reserve bank of St.Louis

source: Introductory statement

Jean-Claude Trichet, President of the ECB, Frankfurt am Main, 5 June 2008

read also: What credit crisis? - Commercial and Industrial Loans are still growing
Friday, April 25, 2008

Tuesday, July 15, 2008

Wesbury sees close to four percent growth in the second quarter

Usually I don't care much about Washington consensus pundit L.K., but on the issue of the dollar and Fed's Bernanke we see eye on eye. In this interview he has an interesting crowd with Laffer as the inflation dove and Wesbury as the inflation hawk.
Wesbury sees at least 3 percent or higher (close to four percent) growth in the second quarter!

click for video

source: Bernanke's Next Move
Assessing Fed chief Ben Bernanke's outlook on the economy, with Art Laffer, Laffer Investments; Michelle Girard, RBS Greenwich Capital; Brian Wesbury, First Trust; and CNBC's Larry Kudlow.

On trend to one million foreclosures by year end

HW comments on the disturbing increase on nationwide foreclosure filings as reported by real estate information service

Almost a half-million Americans lost their homes to foreclosure in the first half of the year, nearly double the same time a year ago. That’s six of every 1,000 households nationwide repossessed by the bank following foreclosure so far in 2008, according to real estate information service

“If the trend continues, we could see one million properties lost to foreclosure across the country by year-end,” says Alexis McGee, expert, educator, and president of

REO filings for June — all 87,465 of them — were up 5.35 percent over May and up 15.8 percent quarter over quarter, McGee said. Not surprisingly, REO volume has been centered inc California, Florida, and Arizona; California alone has seen 116,857 REO properties come online this year, representing 10.2 of every 1,000 households in the state.

source: Nearly Half-Million Foreclosures in First Half of 2008: Report

Monday, July 14, 2008

Cal bank IndyMac announces bankruptcy

This interesting video comes from Barry Ritholtz's blog "The Big picture"
IndyMac Bank CEO Michael Perrym in an interview on CNBC in September 2006. On Friday 11, 2008 the company filed for chapter 11, marking the second largest bank failure in the US since Continental Illinois.

September 20, 2006:

source: Video: IndyMac CEO Interview on CNBC
Posted by Barry Ritholtz, The Big Picture blog

Regional banks in the cross-hair of the real estate downturn

Associated Banc-Corp reported declining second quarter earnings. The company said that six housing-related commercial real estate loans accounted for the majority of the big loan losses. One glimmer of hope: Regional bank Associated Banc-Corp said Monday its board of directors declared a regular dividend of 32 cents.

The Business Journal of Milwaukee:
The Green Bay-based parent of Associated Bank (NASDAQ: ASBC) said Monday its second-quarter net income was $47.4 million, or 37 cents per share, compared with $75.8 million, or 59 cents per share, for the second quarter of 2007.

Associated executives said the bank’s provision for second-quarter loan losses was $59 million, or approximately 30 cents per share after tax, compared with $23 million for first quarter, or approximately 12 cents per share after tax. Net charge offs were $37 million for the second quarter, which ended June 30, compared with $16 million for first quarter.

The company said that six housing-related commercial credits accounted for $21 million of the quarter’s $37 million in net charge offs. The allowance for loan losses to total loans ratio increased to 1.42 percent at June 30, compared to 1.32 percent as of March 31.

Associated’s nonperforming loans increased $81 million during the quarter to $289 million, which bank executives attributed primarily to six commercial credits all related to the housing industry, including five construction credits totaling $51 million and a $20 million commercial credit.

source: Housing, real estate woes sink Associated’s 2Q profit
The Business Journal of Milwaukee

EA industrial production weakened further in May 2008

Industrial production (excluding construction) in the EA weakened further in May 2008. IP working day adjusted (not seasonally adjusted data series) compared to May 2007 was down more than neg. 5% in Estonia, Greece, Spain, Latvia, and Portugal. It was down less than neg. 5% in France, Italy, Sweden and UK. Production indices working day adjusted were below 100 (base year 2000) only in Greece, Italy, Portugal and UK and close to base year in Spain and France.
From this it is clear that IP (less construction) has slowed significantly in the EA but remains strong in most Eastern European countries and Germany.

from Eurostat:
In May 2008 compared with May 2007, production of capital goods increased by 2.2% in the euro area and by 1.9% in the EU27. Intermediate goods fell by 0.6% in both zones. Energy dropped by 1.2% in the euro area and by 1.1% in the EU27. Non-durable consumer goods declined by 3.2% and 2.8% respectively. Durable consumer goods decreased by 5.2% in the euro area and by 2.6% in the EU27.
Among the Member States for which data are available for May 2008, industrial production rose in twelve and fell in nine. The highest increases were registered in Ireland (+9.2%), Bulgaria (+8.6%) and Denmark (+7.4%), while the most significant decreases were recorded in Latvia (-8.1%), Estonia (-6.7%) and Greece (-6.6%).

click to enlarge

source: Industrial production down by 1.9% in euro area
Down by 1.4% in EU27 Eusrostat newsrelease

Sunday, July 13, 2008

Today 43 nations from Europe, Afrika and the Middle East founded the Union of the Mediterranean.

Friday, July 11, 2008

The US government payed $106.28 for crude oil in May 2008

The U.S. Bureau of Economic Analysis published data for imports of energy related petroleum products, including crude oil, for May 2008. Crude oil consumption was at 9.48 thousand bpd down from 10.1 thousand bpd in April 2008. According to the data the U.S. paid $106.28 per barrel of crude in May 2008, that is substantially lower than the average forward price of $122.17 for the same month. This illustrates clearly a disconnect between the physical crude oil market and the forward pricing mechanism in the futures market.

click to enlarge


U.S. Census Bureau, U.S. Bureau of Economic Analysis, May 2008

In May 2008 exports up a healthy 0.9 percent

Bottom Line no marked slowdown in the US economy according to US trade data released today from the U.S. Census Bureau. In general exports are outpacing imports by a small margin helping to shrink the trade deficit. Both exports and imports remained strong in the month of May 2008. Not surprisingly imports and trade deficit from OPEC countries Saudi Arabia and Venezuela continued to increase. Imports from NICS (Hong Kong, Korea, Singapore and Taiwan) were at $45.38 billion in January to May 2008 period, down slightly from the same period a year ago at $46.04 billion (the numbers are n.s.a.). With all other major trading partners import-growth remained positive this year compared to last year. The largest trade deficit with a single nation was with China at $96 billion YTD.

Real imports chain-weighted in U.S. dollars were down in May 2008 which points towards a mild slowdown in the domestic economy. The total census basis of $133.69 billion was down from $136.14 billion in April 2008 and down from $136.87 billion in May 2007. Most of this decline in imports is due to the category "Residual" which was a negative $4.92 billion in May 2008 and only a negative $1.9 billion in May 2007. The Census Bureau defines this category as the difference between total imports and the sum of the components in the table. The major import categories, capital goods and consumer goods, actually increased slightly on a monthly and yearly basis.

Real exports chain-weighted in U.S. dollars remained vibrant in May 2008 at $90.1 billion compared to $81.6 billion in May 2007. That bodes well for the global economy which remained strong and healthy in the month of May. Real exports in May 2008 for capital goods were at $39.5 billion compared to $40.1 billion in April 2008, and for consumer goods at $12.2 billion the same as in April 2008. Real exports were up across all categories compared to same month last year.

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Among EA countries Ireland saw a marked decline in U.S. exports $812 million to $528 million from April to May 2008. Exports to Switzerland declined from $2.3 billion to $1.79 billion, exports remained stable to Germany, Italy, Spain and France in the same time period.

See the full report here.

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U.S. Census Bureau, U.S. Bureau of Economic Analysis, May 2008

U.S. import prices up a devastating 20.5 percent y/y in June 2008

Here is what Barron's Econoday had to say:
Econoday's reports should be more than just a list of percentage changes but in this case the increases are so elevated and so widely spread that a simple list serves the purpose of relaying the news: businesses are being hit by the greatest input cost pressure in memory. So far, businesses have been able to absorb these costs through productivity gains and by paring down their workforces. How long the consumer will remain insulated, that is not paying significantly higher prices for non-energy non-food goods, is arguably the greatest question facing the global economy and global economic policy makers.

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source: Barrons Econoday

GE's reports second quarter earnings in challenging domestic environment

GE's second quarter earnings report came in line with expectations. The overall picture is one of a continuing difficult domestic environment, offset in large parts by global growth. At least for the first half of 2008 global growth remains exceptionally strong. Given the inflationary environment that is squeezing the margins (down 40bp for GE) for businesses the overall environment remains challenging. "Many markets and industries remain healthy, while the U.S. economy is challenged," GE Chief Executive Jeff Immelt said in a statement. The company also gives a somewhat disappointing outlook for the third quarter with profits flat to down in all its business segments.

GE 2Q 08 earnings highlights:
Industrial segments profit was down 32 percent on a challenging and difficult domestic environment (housing). US orders in this segment are down 7 percent offset by growth in Asia up 19%, Europe up 21% and Latin America up 15%. U.S. industrial revenues are down 1% offset by strong global growth in Asia up30%, Latin America up25% and Europe up21%.

GE's operating profit margins are down 40bp with C&I down 60bp equipment/service down 30bp, partially offset by price/DM inflation up 20bp.

GE's financial services business continues to experience a challenging environment with segment profits down 9%. This despite profit outside the Americas is up 5%. GE reports that US delinquencies on its loan portfolio were higher 105bp at 5.55% in 2Q08.

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source: GE 2008 second quarter performance

July 11, 2008

Thursday, July 10, 2008

U.S. foreclosure activity up53 percent in June 2008 vs a year ago

U.S. foreclosure activity in June decreased 3 percent from the previous month but was still up 53 percent from June 2007, according to the RealtyTrac U.S. Foreclosure Market Report released today.

from Realty Trac:
One could argue that this chart shows that the bulk of the properties that were at risk for foreclosure have migrated through the process and are now being repossessed by the foreclosing lenders. There is not a continued massive surge in defaults and auction notices, so once the lenders have disposed of their REO inventory, the real estate market can start to return to normal. On the other hand, some might argue that many properties are still at risk for falling into foreclosure, but the default notices against those properties may have been delayed by artificial means -- for example laws in Colorado, Maryland and Massachusetts requiring lenders to give homeowners more time before initiating foreclosure. Those artificial means may just temporarily be forestalling another wave of defaults that we'll see sometime in the coming months.

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From HW comes this nice summary "Where the metros are":
For the third month in a row, California and Florida cities accounted for nine out of the top 10 metropolitan foreclosure rates among the 230 metropolitan areas tracked in the report.

Seven California metro areas were in the top 10, and the top three rates were in California: Stockton, with one in every 72 households receiving a foreclosure filing; Merced, with one in every 77 households receiving a foreclosure filing; and Modesto, with one in every 86 households receiving a foreclosure filing. Other California metro areas in the top 10 were Riverside-San Bernardino at No. 5; Vallejo-Fairfield at No. 7; Bakersfield at No. 8; and Salinas-Monterey at No. 10.

The top metro foreclosure rate in Florida was once again posted by Cape Coral-Fort Myers, where one in every 91 households received a foreclosure filing — fourth highest among the nation’s metro foreclosure rates. The foreclosure rate in Fort Lauderdale, Fla., ranked No. 9.

Las Vegas continued to be the only city outside of California and Florida with a foreclosure rate ranking among the top 10. One in every 99 Las Vegas households received a foreclosure filing in June, more than five times the national average and No. 6 among the metro areas.
source: Foreclosure Activity Deflating or Just Deferred?

source: Foreclosure Activity Deflating or Just Deferred?
RealtyTrac, Thursday, July 10, 2008 1:59 AM

Where the metros are

Wednesday, July 9, 2008

Foreign central bank holdings of government debt still increasing

Brad Setser points to an interesting fact that foreign central banks keep buying US treasury and agency debt in record amounts. In the first half of 2008 central bank's holdings of Treasuries and Agencies have increased by a staggering $283.5 billion. This is even more surprising since the US dollar has depreciated significantly during this time period and before. Many have argued in the past and continue to do so that a depreciating dollar could lead to a shift away from the greenback and US government debt, but at least for now Federal Reserve Balances data clearly discount that possibility. Brad Setser in his blog concludes that this may not continue and high inflation in a host of countries compounded with unwanted capital inflows in the case of China may strain the system. The interesting question then will be what happens to interest rates (how high will they go?) and to the global balance of payment impairments that supported supply side economies for the last two decades? The good thing is that we don't have to worry about it just yet.

from Setser's blog:

Between June 4 and July 2, central banks added $45.2b to the custodial accounts at the New York Fed; between May 28 and July 2 (a five week period) central banks added $54.6b to their accounts. That wasn’t as much as April — but it was a lot more than May. It brought the total for Q2 up to $132.7 billion (nearly equally split between Treasuries and Agencies) — only a bit below the $150.8b increase in q1.

Not all central banks make use of the New York Fed, though someone big clearly is. The growth in the the Fed’s custodial holdings consequently is a minimum, not a maximum. Total official purchases of US debt are far higher than the increase in the custodial accounts at the Fed. Nonetheless, it is worth noting that the increase in the Fed’s custodial accounts so far this year, annualized, is well in excess of total recorded official purchases in 2007.

I have continually been surprised by the willingness of the world’s central banks to buy dollars, or perhaps by the reluctance of the leadership of many key countries to shift away from managing their currencies against the dollar. But the strains on the current system — high inflation in a host of countries adding to their reserves rapidly, and unwanted capital inflows into China — have become rather visible.

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update: Wed. July 9th, 4:40 p.m.
Bloomberg reports today that The GSE's Fannie Mae and Freddie Mac have their top credit rating downgraded by credit derivative traders from Aaa (Moody's) to A2.
from Bloomberg:
Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower. Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage finance companies are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service....The price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.

source: The quiet bailout continues …

Brad Setser's Blog: Follow the Money

Fannie, Freddie Downgraded by Derivatives Traders

UK trade data May 2008: exports to main trading partners remain strong

The Office for National Statistics published UK trade data for May 2008. Lets look at exports to get a clue about the health of the global economy.

Exports to EU trading partners during the latest 3 months compared with previous 3 months were down 1.8 percent and 3.4 percent with Spain and France respectively. Compared to the same period last year exports were up 7.9 percent and 3.2 percent. Exports to Italy and the Irish Republic were up 0.6 and 6.2 percent respectively compared with previous 3 months.

Exports to non-EU trading partners remained strong in May 2008. Exports to the U.S. increased 4.7 percent latest 3 months compared with previous 3 months. Exports to China are up 6.4 percent during the same time period and increased a staggering 40.4 percent compared to the same 3 months last year. Exports to Hong Kong are down 3.6 percent compared with previous 3 months but are still up 48 percent compared to last year.

This fairly strong global trade picture has to be taken with a grain of salt and is partially related to higher prices of goods and services due to inflation. Import and export prices are at record levels. The Office for National Statistics publishes an index of volume of total trade in goods with 2003 as 100. According to this index seasonally adjusted volume for exports to EU countries is down 4.3 percent in May 2008 compared to last month. Export volume to non-EU countries increased by 3.9 percent over the same time period. Volume is down mostly in consumer goods and capital goods which does not bode well for the health of the consumer. In light of higher prices for goods and services export data from Germany (see previous post) have to be reviewed with caution. Unfortunately the Statistical Bundesamt Deutschland does not publish volume data in its monthly report.

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source: UK trade May 2008

Office for National Statistics

read also: Germany's exports remained strong in May 2008

Wednesday, July 9, 2008

Germany's exports remained strong in May 2008

Export growth in Germany, Europe's largest economy, stayed strong in May 2008. Exports in a non adjusted bases were at EUR 80.8 billion up 2.5 percent from a year ago. The current account of the balance of payments showed a surplus of EUR 71.3 billion in the January to May 2008 period, up from EUR 70.1 billion the same period a year ago. Exports to third countries outside EU member states remained strong at EUR 28.3 billion up 4.2 percent from a year ago. USA, China and Russia are Germany's main trading partners outside the EU member states. In 2007 Germany exported commodities to the value of EUR 73.3 billion to USA, 29.9 billion to China and 28.1 billion to Russia.

From the Federal Statistical Office:
In May 2008, Germany dispatched commodities to the value of EUR 52.5 billion to the Member States of the European Union, while it received commodities to the value of EUR 43.3 billion from those countries. Compared with May 2007, dispatches to and arrivals from the EU countries increased by 1.5% and 5.7%, respectively. Commodities to the value of EUR 34.5 billion (+0.5%) were dispatched to the euro area countries in May 2008, while the value of commodities received from those countries was EUR 29.9 billion (+5.4%). Commodities to the value of EUR 18.0 billion (+3.6%) were dispatched to EU countries not belonging to the euro area in May 2008, while the value of the commodities which arrived from those countries was EUR 13.4 billion (+6.4%).

Germany exported commodities to the value of EUR 28.3 billion to and imported commodities to the value of EUR 23.2 billion from countries outside the European Union (third countries) in May 2008. Compared with May 2007, exports to third countries were up by 4.2% and imports from those countries by 13.3%.

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global map German exports 2007

source: German exports in May 2008: +2.5% on May 2007

Statistisches Bundesamt Deutschland,templateId=renderPrint.psml

German insolvencies up 6.2 percent in April 2008

Insolvencies of enterprises and other debtors unexpectedly spiked higher in April 2008 compared to a year ago. Some of this increase has been attributed to early Easter holidays. The January to April period registered a marked decrease (-8.6%) in insolvencies compared to a year ago. Nevertheless this spike in insolvencies is worrisome and requires close monitoring in the coming months.

From the Federal Statitical Office:

As reported by the Federal Statistical Office (Destatis), in April 2008, German insolvency courts reported 14,160 insolvencies: 2,781 of them referred to enterprises and 11,379 to other debtors. Without the results of Nordrhein-Westfalen the total number of insolvencies increased 6.2% compared with April 2007, enterprise insolvencies increased 9.2% and insolvencies of other debtors increased 5.7%. Since the number of insolvencies have tended to decline recently, the increase in April 2008 compared to April 2007 might be attributed to the fact that Easter holidays in 2007 fell in April whereas in 2008 they were in March, and thus the courts in April 2008 could deal with markedly more insolvency requests than in the corresponding month of the previous year.

From January to April 2008, 52,441 insolvencies (–8.6%) were registered, 9,928 of which were enterprise insolvencies (–7.5%). Altogether the courts registered 32,904 consumer insolvencies, that were 9.4% less than in the period from January to April 2007. The change rates refer to computations without Nordrhein-Westfalen.

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source: 6.2% more insolvencies in April 2008

Statistisches Bundesamt Deutschland,templateId=renderPrint.psml

Tuesday, July 8, 2008

China's economy and the battle with inflation

Michael Pettis, professor at Peking University's Guanghua School of Management and author of the excellent blog China Financial Markets, weighs in on the falling Chinese stock market. The SSE Composite index is off 40 percent YTD and represents the worst performing stock market globally. At this point valuations seem to be compelling for some but not for Mr. Pettis who sees a recovery in the markets possible for other interesting reasons. In his opinion Chinese authorities are beginning to shy away from inflation as their major concern leaning now more towards supporting growth.

As recently as March and April preventing inflation was the number one policy task and one of Premier Wen’s “two prevents” (preventing overheating was the other), but now it is just “one of the major tasks”. Fighting an economic slowdown seems to have taken priority.

This apparent shift away from inflation is a particular concern because it downplays the potential of hot money inflows to destabilize China's economy. According to Mr. Pettis this could very well lead to a crisis. His main point over the last couple of month is to suggest to the authorities to implement a one off revaluation of the yuan to put a halt to speculative money inflows, although he is worried that this "least bad" policy is coming at a heavy cost.

I have never been an inflation hawk and I do agree that sometime a little bit of inflation is very far from being the end of the world, but as regular readers of my blog know, I think in the last few years China has been sitting on explosive and potentially very destabilizing money inflows, with the attendant money creation, and so I suspect that China does not really have “a little bit” of inflation as one of its policy options. I think that, like the US in the early 1970s, in China we’ve had our delightful monetary party with all the attendant good things, but the party is nearly over and it is going to be very hard to keep the lid on inflation over the next few months and years. I think by the end of this year it will get much worse.

Perhaps it is not unreasonable for stocks to be trading at crisis valuations. On the one hand there is a potential economic slowdown that could depress earnings sharply. On the other hand, a policy shift to combat this potential slowdown risks an even greater undermining of national balance sheets which, when combined with the huge money creation and the increasing role of very pro-cyclical hot money in that money creation, could very well lead to a crisis.

Ambrose Evans-Pritchard, a writer for The Daily Telegraph, blows into a similar horn and warns of rising oil prices, wage inflation and sagging exports posing a triple threat to China's economy.

Foreign reserves have reached $1.8 trillion, playing havoc with the money supply. Declared inflation is just 7.7pc, but that does not begin to capture the scale of repressed prices, from fuel to fertilisers. "There is a lot more bottled-up inflation in this economy than meets they eye," says Stephen Green, from Standard Chartered.

Inflation merely steals growth from the future. It defers monetary tightening until matters get out of hand, which is where we are now. Vietnam has already blown up at 30pc. India is on the cusp at 11pc, so is Indonesia (11pc), the Philippines (11pc), Thailand (9pc) - leaving aside the double-digit Gulf.

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source: Shanghai seems to discount the fight against inflation

By Michael Pettis
source: Oil price shock means China is at risk of blowing up

By Ambrose Evans-Pritchard, The Daily Telegraph