Bond market ripping again ...

The yield on the 10-year U.S. Treasury Note just breached 3% to the downside. This is the lowest T-Note yield in U.S. history (my data goes back to January 1962). December long bond futures are up almost a point and a half to 128 11/32. If we close here, it would be a new high (though the intraday high is up at 129 19/32, set on November 20). Treasury bills continue to yield essentially nothing -- 0.015% on the 1-month bill and 0.076% on the 3-month.

New home sales drop 5.3% in October

The latest new home sales figures for October have been released. Here is what they showed:

* New home sales dropped 5.3% to a seasonally adjusted annual rate of 433,000 from a downwardly revised 457,000 in September (originally reported as 464,000). That was slightly worse than the forecast for a reading of 441,000, and the lowest sales rate since January 1991.

* The raw supply of homes for sale continues to decline due to aggressive cutbacks in home construction. It shrank 8% to 381,000 from 414,000 in September. But because sales declined as well, the months supply at current sales pace indicator of inventory swelled to 11.1 from 10.9 in September. That's just shy of the 11.4 month peak set in August.

* The median price of a new home dropped 7% from a year ago -- to $218,000 from $234,300. That leaves new home prices at the lowest level since September 2004.

October was a disappointing month for the home building industry, as expected. Sales slumped to the lowest level in 17 years, while prices retreated to levels we haven't seen in four years. The one encouraging trend in the new home market -- which we haven't seen repeated in the existing home market yet -- is the decline in housing inventory. The dramatic drop in construction activity has led to a sharp decline in the supply of new homes on the market.

The demand side of the equation remains challenging, with unemployment on the rise and the economy on the decline. But it's possible the market will see a pop as a result of the recent sharp decline in mortgage rates. The Fed's announcement that it would start buying mortgage backed securities has helped drive conventional, 30-year fixed rates into the mid 5s from just over 6%.

Economic data flooding in, with most of it bad

We just got a big batch of economic data, and most of it doesn't look good -- though it's not exactly a surprise on Wall Street. A quick recap:

* Durable goods orders plunged 6.2% in October, more than twice the forecast for a 3% drop and the biggest decline since October 2006 (-8.3%). If you strip out transportation, you get a 4.4% decline, almost triple the 1.6% fall that was anticipated and the worst since January 2002. Non-defense capital goods, ex-aircraft, orders, a key measure of business spending, plunged 4%.

* Personal income was up 0.3% on the month, slightly better than the 0.1% forecast. But spending dropped 1%, a big downgrade from the prior month's 0.3% decline and the sharpest contraction since the month of the 9/11 attacks.

* Initial jobless claims came in at 529,000, down slightly from last week's 543,000 but still well into the danger zone. Continuing claims dipped to 3.962 million from a revised 4.016 million filers in the prior week. The four-week moving average of claims climbed to 518,000, the most since January 1983.

Feds Gone Wild!!

Forget those tacky "Girls Gone Wild" movies. We're watching a better movie these days -- "Feds Gone Wild." The government and the Federal Reserve have now managed to rack up a whopping $7.8 TRILLION in obligations fighting the credit crisis. That includes direct bailouts, guarantees, loan commitments, and other liabilities. The Fed is also rapidly barrelling down the path to quantitative easing -- essentially printing money out of thin air to fund bailout after bailout.

Risk is extremely high here. Policymakers are trying to fight the "Japan in 1990s" scenario where twin busts in stocks and real estate led to a Lost Decade of dismal economic performance. But at the complete other end of the spectrum is the Weimar Germany scenario, where rampant money printing leads to hyperinflation and a currency collapse.

The Fed and Treasury clearly believe they can thread the needle, providing an abundance of stimulus now, then withdrawing it later before a real inflation problem sets in. Americans better hope they're right. More from the New York Times below ...

"But the new programs also represented a new level of commitment by the Federal Reserve. Instead of trying to strengthen the economy by reducing short-term rates, which is the usual policy tool, the Fed is now pumping vast amounts of money directly into specific markets for mortgages — and anything else it believes needs help.

"Over the last year, the Fed and the Treasury have bailed out major Wall Street firms, rescued the world’s biggest insurer, taken over Fannie Mae and Freddie Mac, and guaranteed hundreds of billions of dollars in bank transactions.

"As big as the two new lending programs are, Mr. Meyer cautioned that they were only going to reduce the pain that lies ahead, not eliminate it. Unemployment, at 6.5 percent in October, is still likely to climb to 7.5 or even 8 percent next year, he predicted. But it may not shoot up to 9 or 10 percent, a level that economists often consider the unofficial dividing line between a recession and a depression.

"The new actions are unlikely to be the last. Until the economy begins to turn around, Fed officials have made it clear they are prepared to print as much money as needed to jump-start lending, consumer spending, home buying and investment.

“They are using every tool at their disposal, and they will move from credit market to credit market to reduce disruptions,” said Richard Berner, chief economist at Morgan Stanley.

"The Federal Reserve has now moved to a radical new phase of its effort to shore up the economy. Until now, it has carefully distinguished between two goals — reducing the panic and turmoil in financial markets, and propping up the economy itself, which has been battered as the supply of credit has dried up.

"To tackle the first goal, the Fed expanded its lending programs to banks and Wall Street firms, and organized the rescue of failing firms like Bear Stearns.

"To bolster the general economy, it relied on its traditional tool: reducing the overnight Federal funds rate, the interest rate that banks charge for lending their reserves to one another.

"Normally, a lower Federal funds rates leads to lower long-term rates, like those for mortgages.
But the central bank has already lowered the rate to 1 percent, and it cannot reduce it below zero. Instead, policy makers are buying up other kinds of debt securities, which has the effect of driving down the rates in those parts of the market.

"The move amounts to what economists refer to as “quantitative easing,” which means having the Fed pump staggering amounts of money into the economy by buying up a wide range of debt instruments.

"In a conference call with reporters, Fed officials insisted their goal was not to pursue a policy of quantitative easing, but simply to unfreeze the mortgage market.

"But for practical purposes, the actions lead to similar results."

FDIC: Banking sector hammered in Q3

The latest Quarterly Banking Profile (QBP -- PDF link) from the FDIC was released today. This comprehensive document provides lots of juicy details about the performance of the U.S. banking sector. As you might expect based on the headlines we've been seeing lately, the news isn't that good. Some details:

* The banking sector earned a cumulative $1.7 billion in the third quarter, down 94% from $28.7 billion in the year-earlier quarter. That was the second-worst reading since Q4 1990 (behind Q4 2007). Almost six in 10 institutions reported a drop in profit, while about one in four reported a quarterly loss.

* Provisions for loan losses exploded to $50.5 billion from $16.8 billion a year earlier. Net Interest Margins (NIM) improved to 3.37% from 3.35% a year earlier, helping boost net interest income by 4.9% YOY. But noninterest income dropped 1.5%. Securitization income plunged by 33%, while gain on asset sales (other than loans) tanked 78.7%. Banks lost 588% more on the sale of foreclosed real estate than a year earlier.

* Net charge offs surged 156.4% to $27.9 billion in the quarter. First mortgage and closed-end second mortgage charge offs were up 423%, while real estate construction and development C-Os rose 744%. HELOC charge offs surged 306%. Commercial and Industrial COs rose 139%, while credit card COs climbed 37.4%. The quarterly CO rate rose to 1.42% from 0.57% a year earlier.

* Noncurrent loans and leases rose to $184.3 billion, up 122% YOY. The percentage of loans NCLs increased across the board, with closed end first and second mortgages leading the way at +14.3%. While loan loss reserves rose 8.1% in the quarter, bringing the ratio of reserves to toal loans and leases to a 13-year high of 1.95%, NCLs rose faster than reserves. Result: The coverage ratio of reserves to NCLs fell to 85 cents for ever $1 of NCLs -- the lowest level since Q1 1993.

* Nine institutions failed in the third quarter, the highest quarterly tally in 15 years. With $307 billion in assets, Wamu was by far and away the biggest failure in the quarter and the FDIC's 75-year history. The number of financial institutions on the FDIC's "problem list" jumped to 171 from 117, while the total assets of problem institutions climbed to $115.6 billion from $78.3 billion.

S&P/Case-Shiller: Home prices down 17.4% YOY in September

The latest figures from S&P/Case-Shiller show home prices are continuing to fall. Not much of a surprise there, of course, but what is noteworthy is the re-acceleration in the monthly decline in home prices. The 20-city index dropped 1.85% in September. That compared to a 1.05% decline in August, a 0.86% drop in July and a 0.49% fall in June. The year-over-year decline in the index came in at 17.4%, another record decline and up from 16.6% in August.

Prices fell on a monthly basis in all 20 cities in the index. On a year-over-year basis, the biggest declines were in the same regions as before -- Florida, California, Arizona, Nevada, and so on. Phoenix was the worst market at -31.9% YOY, followed by Las Vegas at -31.3% and San Francisco at -29.5%.

Fed announces new ABS, MBS programs

The Federal Reserve is extending its tentacles even further into the credit markets with two new programs this morning. One is targeted at the Asset Backed Securities (ABS) market and one is targeted at the Mortgage Backed Securities (MBS) arena. Here are some details:

First, we now have the TALF -- the Term Asset-Backed Securities Loan Facility. This one is targeted at ABS backed by student loans, auto loans, credit card loans and Small Business Administration loans. The New York Fed will lend as much as $200 billion to holders of AAA-rated ABS, with the Treasury Department providing $20 billion in credit protection via the TARP. The program is open to "all U.S. persons that own eligible collateral" -- is other words, not just Fed-regulated banks, though borrowers will have to use a primary dealer as their agent.

Second, the Fed is now going to join the Treasury Department in manipulating pricing in the MBS market in an attempt to lower consumer loan rates. The Fed said it will buy up to $100 billion of Fannie Mae, Freddie Mac, and Federal Home Loan Bank debt starting next week. It will also start purchasing as much as $500 billion in agency-backed MBS, through asset managers, sometime between now and year-end.

The immediate reaction: A rally in stock futures and a 23 basis point drop in the spread between Freddie Mac's 10-year debt and U.S. Treasuries of similar maturity. Yields on current coupon Fannie Mae 30-year MBS are dropping by about 30 basis points. In other words, "wholesale" mortgage rates are coming down. U.S. long bond futures are also rising -- up 1 8/32 in price at last check.

Personally, I want to know when the Fed is going to get more creative with all of these acronyms. TAF, TSLF, PDCF, MMIFF, CPFF -- they all lack originality. Couldn't we name a program the "Mortgage Interest Lowering Facility?" Or how about the "Stabilize Housing Interest Trust?"

Existing home sales drop 3.1% in October

The National Association of Realtors recently released its latest existing home sales figures. What happened in October? Have a look ...

* Sales fell 3.1% to 4.98 million units (at a seasonally adjusted annual rate) from a revised 5.14 million in September. That was down 1.6% from 5.06 million units a year earlier.

* The inventory of homes for sale edged down to 4.234 million units from 4.272 million. The "months supply at current sales pace" indicator of inventory climbed to 10.2 months from 10 in September. Regionally, home sales dropped in all four regions -- by 1.2% in the Northeast, 1.6% in the West, 3.2% in the South, and 6% in the Midwest. Single family home sales dropped 3.3%, while condo and co-op sales slipped 1.8%.

* Home prices dropped sharply, with the median price of an existing home down 11.3% from a year earlier to $183,300. That's the biggest decline on record. Prices are also down 4.2% from September's $191,400. Home prices are now at their lowest level since March 2004 ($183,200).

There wasn't much surprising in today's existing home sales figures. Sales remain mired in the 5 million unit area, with monthly swings either way but no net progress. The weak economy, tighter credit markets, and lackluster consumer confidence are keeping most potential home buyers on the sidelines, and that's unlikely to change any time soon. Prices are falling sharply as a result, with any home price gains made since early 2004 essentially wiped out on a nationwide basis. Look for conditions to remain challenging well into next year, if not 2010.

Bank Failure Friday turns it up a notch

It's a three-fer on this Friday, with bank failures number 20, 21, and 22 all in one evening. Some more details:

Failure #20: Community Bank of Loganville, GA Bank of Essex of Tappahannock, VA will assume Community Bank's deposits and four branches. Community Bank had assets of $681 million, only $84.4 million of which Bank of Essex decided to purchase (The FDIC is stuck with the rest to resolve over time). However, Bank of Essex is assuming all the deposits of Community Bank. The FDIC estimates it will take a hit to the Deposit Insurance Fund of somewhere between $200 million and $240 million.

Failures #21 and #22: Downey Savings and Loan of Newport Beach, CA. and PFF Bank & Trust of Pomona, CA. U.S. Bank of Minneapolis, MN is absorbing the combined 213 branches the two institutions operate and acquired all the deposits. Downey had assets of $12.8 billion and deposits of $9.7 billion as of September 30. PFF had assets of $3.7 billion and deposits of $2.4 billion.

The FDIC says U.S. Bank is purchasing "virtually all" of the two banks' assets. U.S. Bank has agreed to assume the first $1.6 billion of losses on the assets that are covered by a deal between it and the FDIC; the FDIC will then share in any losses above and beyond that level. The FDIC estimates the DIF will take a $1.4 billion hit on the Downey failure and a $700 million beating on the PFF transaction.

So to sum up, we just witnessed the failure of banks with $17.2 billion in assets -- in one weekend. That's not exactly chump change.

News report: Tim Geithner for Obama's Treasury Secretary

NBC News is reporting that President-Elect Obama will nominate New York Fed President Tim Geithner as the next Treasury Secretary. Regarding the rest of Obama's economic team, NBC News reports:

"Former Treasury Secretary Summers -- also considered for the post -- might still play a major future role in the Obama administration, according to sources. Summers came under fire from women's groups because of controversial comments he made about gender issues while President of Harvard, but sources say the decision to choose Geithner had more to do with Obama's interest in "change" and getting someone new on the team.

"Also expected Monday -- an announcement that former U.N. Ambassador and Energy Secretary in the Clinton administration, New Mexico Governor Bill Richardson, will be Commerce Secretary.

"Paul Volcker is expected to play a continuing advisory role -- not clear if he would have an appointed position.

"Other economic appointments for the White house staff will likely include Dan Tarullo, a top Obama advisor, possibly as head of the National Economic Council.

"Other economic posts -- perhaps at the Council of Economic advisors in the White House -- could be filled by Obama economic advisors Austin Goolsbee and Jason Furman."

Treasury bond pandemonium

The long bond futures -- if you include the day session AND the after-hours session -- are now up 7 9/32 points in price. The cash 30-year bonds are up 8 31/32 points. The yield on the 10-year Treasury is down 33 basis points to 2.99%, while the yield on the 2-year Note is down just under 10 basis points to 0.96%. These are not typos. These are, however, the biggest price increases I have ever seen, and the lowest yields in the history of each bond maturity.

Paulson on the economy

If you're interested, here are some remarks on the economy from Treasury Secretary Henry Paulson that were just released. The up-front summary of their content:

"We are working through a severe financial crisis caused by many factors, including government inaction and mistaken actions, outdated U.S. and global financial regulatory systems, and by the excessive risk-taking of financial institutions. This combination of factors led to a critical stage this fall when the entire U.S. financial system was at risk.

"This should never happen again. The United States must lead global financial reform efforts, and we must start by getting our own house in order.

"The most significant discussion of financial system reform in the last 60 years has begun. This debate offers great opportunities -- and great peril. The events of the last year have exposed excesses and flaws that are, to put it mildly, humbling. If we do not correctly diagnose the causes, and instead act in haste to implement more rather than better regulations, we can do long term harm."

Meanwhile, keep an eye on the bonds and the dollar here. Both are attempting to close today's trading session at fresh highs. Of course, given how volatile the markets have been lately, there's no guarantee that won't change in the next hour or two.

Historic levels for interest rates

These are truly historic periods for interest rates, folks. The continuous long bond futures are surging by another 2 21/32 as I write to just under 125. These are the highest price levels in years. The cash 30-year bond rocketed 3 25/32 yesterday and it's up another 3 7/32 as I write. Enormous moves.

Meanwhile, the yield on the 10-year Treasury Note is down about 16 basis points to 3.16%. The deflation scare low was 3.11% in June 2003. I can't find another lower level in my database, which goes all the way back to 1962. The 2-year Treasury Note is yielding less than 1%, the lowest I can find in decades. And suppose you wanted to sock some money away in a 1-month T-bill? You'll earn a whopping 0.005%. No that's not a typo.

What's the cause here? Well, this Washington Post story pretty much sums it up ...

"Businesses cut prices at a record rate last month, builders started fewer new homes than anytime on record, and last week more people filed for new unemployment benefits than in any week since 1992, according to government data, as the outlook for the economy continues to dim.

"The Labor Department announced this morning that new applications for jobless benefits rose to a seasonally adjusted 542,000 last week. It also revised the figure from the previous week down to 515,000.

"That follows announcements yesterday that new-home starts in October were the lowest since at least 1959, when the government began keeping data. The consumer price index plummeted by the most since that series of monthly data was started in 1947, as the economy slowed so abruptly that companies had to slash prices to sell products.

"And Federal Reserve leaders released projections indicating they expect the economy to worsen significantly in the coming year. The most pessimistic of 17 Fed officials expects joblessness to rise to 8 percent at the end of 2009, which would be the highest in a quarter-century."

Commercial R.E. following residential over the ledge

I have been warning for almost two years now that commercial real estate sales, prices, and construction activity would likely follow the residential real estate sector over the ledge. That appears to be unfolding now.

Case in point: The American Institute of Architects index of billings activity at firms that design commercial buildings. It dropped to 36.2 in October from 41.4 in September and 53.4 in the year-earlier month. The index is now at its lowest level on record (my data goes back to 1995). Meanwhile, prices for commercial mortgage backed securities are falling fast, and so are the share prices of REITs and other firms active in the space.

Housing starts, permits plunge to lowest level on record

We just got October data on housing starts and building permit issuance. Here's the rundown of what the numbers showed ...

* Housing starts were at a seasonally adjusted annual rate of 791,000 last month. That was down 4.5% from a revised 828,000 in September. While slightly ahead of expectations for a reading of 780,000, it was also down 38% from 1.275 million in October 2007 and the lowest since the Census Bureau started tracking the numbers in 1959 (!). The peak reading for starts was 2.27 million units in January 2006, meaning we are down 65.2%.

* Building permit issuance plunged 12.1% to 708,000 units from a revised 805,000 in September. That's down 40.1% from the year-earlier reading of 1.182 million, well below forecasts for a number of 774,000, and also the lowest level ever recorded. Permit issuance is down 68.7% from the September 2005 peak of 2.263 million units.

* Breaking it down by property type, single-family starts dropped 3.3% to 531,000. Multifamily starts dropped 6.8% to 260,000. Single-family permitting activity dropped 14.5% to 460,000, while multifamily permitting dropped 7.1% to 248,000.

The meltdown continues in the residential real estate sector. Every single indicator -- starts, permits, mortgage purchase applications, builder confidence -- indicate that the already struggling industry has taken a header in the past couple of months.

Lower construction activity is necessary to bring supply back in line with demand, and builders have made some progress in reducing new home inventory for sale. But with unemployment on the rise, mortgage credit harder to get, and the broad economy slowing, housing demand is sliding. That could necessitate an even lower level of starts -- hard to imagine given that we are already seeing the lowest level of activity in recorded U.S. history.

MBA figures show purchases falling off the table

The list of negative leading indicators for the housing sector keeps getting longer. First, there was yesterday's dismal NAHB report. Then this morning, we got another batch of truly ugly Mortgage Bankers Association figures on loan applications.

The group's weekly index dropped 6.2% to 398.60 in the week of November 14 from 425 a week earlier. Refinance applications were up by about 2.6%, but purchase mortgage applications fell off the table. The purchase index dropped 12.6% to 248.50 from 284.40. That is the lowest level since a reading of 218.70 in the week of December 29, 2000.

Now here's the thing: The MBA figures do some crazy things around the holidays, with big increases and big decreases historically in the weeks around Christmas and New Year's. That's because of the difficulty of seasonally adjusting the figures. For example, the 12/29/00 week mentioned above showed a 21.4% drop in purchases ... but the week of 1/5/01 showed a 33.9% rise.

So if you exclude that spike down week in the MBA purchase index, you'd have to go all the way back to ... another holiday week, the week of 12/31/99, to find a lower reading (238). For the sake of the seasonal adjustment argument, let's exclude that number. If you do so, you have to go all the way back to the week of March 12, 1999 to find a NON-holiday reading lower than the 248.50 reading we just got.

Bottom line: The housing and mortgage markets are hurting ... really hurting. Anyone who says otherwise isn't looking at the data.

NAHB index plunges to record low of 9 ... Yes I said "9"

The National Association of Home Builders just released its latest Housing Market Index. I have to tell you, this November data is downright atrocious. The details ...

* The overall index plunged to 9 in November from 14 in October. This is a fresh record low for the series, which dates back to 1985. It's also much worse than the forecast for no change from the month before.

* Among the subindices, the one measuring current single family home sales dropped to 8 from 14 ... the one measuring expectations about future sales held steady at 19 ... while the one measuring prospective buyer traffic fell to 7 from 11.

* Regionally, builders couldn't catch a break. The Northeast index dropped to 11 from 16, the Midwest index slumped to 7 from 13, the South index fell to 11 from 16, and the West index plunged to 6 from 11.

If you're looking for a glimmer of hope for the housing market, you aren't going to find it in the latest figures. Builders are universally gloomy about the state of their business across all regions of the country. Readings on buyer traffic and current sales fell sharply, while expectations for future sales held at their record low from October.

The credit crunch is part of the problem. But so too is the broad deterioration we've seen in the U.S. economy in recent months. Some consumers can't afford to buy homes because they can't access mortgage financing or because they have lost their jobs. Others don't want to purchase because they're worried home prices will fall further. Ultimately, it will take lower home prices, even less building activity, and an economic recovery to lay the groundwork for a lasting market rebound. But that is in the future, not the present.

NAR: Prices down 9% in Q3 2008; 79% of MSAs show declines

The National Association of Realtors just released its third quarter data on home prices and home sales. The price data really jumps out at you because it shows that median prices are falling in more metropolitan statistical areas than ever before.

Only 28 of 152 MSAs (18.4%) showed an increase in prices from the year-ago period. Four (2.6%) MSAs showed flat pricing, while 120 MSAs (78.9%) showed declines. For comparison sake, 54 of 150 MSAs (36%) showed falling prices in Q3 2007.

The national median price of a home was $200,500 in the quarter, 9% below the Q3 2007 price of $220,300. Sales were running at a seasonally adjusted annual rate of 5.04 million units, off 7.7% from the year-ago 5.46 million units.

The biggest YOY declines in prices (PDF link) were seen in the "usual suspects": Regions like Las Vegas-Paradise, NV (-28.4%), Cape Coral-Ft. Myers, FL (-31%), Los Angeles-Long Beach-Santa Ana, CA (-35.1%), Sacremento-Arden-Arcade-Roseville, CA (-36.8%), and Riverside-San Bernardino-Ontario, CA (-39.4%). Notable gains were mostly in Midwest and Farm Belt locations, like Witchita, KS (+5.5%), Tulsa, OK (+5.1%), Decatur, IL (+8.7%), and Bloomington-Normal, IL (+8.1%).

House testimony from Bernanke, Bair, Paulson

Wondering how the TARP bailout program is going? Well, Fed Chairman Ben Bernanke, FDIC Chairman Sheila Bair, and Treasury Secretary Henry Paulson are testifying on the subject right now before the House Committee on Financial Services. The name of this hearing is somewhat weighty: "Oversight of Implementation of the Emergency Economic Stabilization Act of 2008 and of Government Lending and Insurance Facilities; Impact on Economy and Credit Availability."

You can read Bernanke's comments here and Paulson's comments here. Bair's testimony is available here.

Retail spending and employment; Plus, more financial sector firings in the works

There's a great story at the Washington Post today about the interplay between retail spending and retail hiring. Specifically, the Post notes that because the holiday shopping season looks so grim, retailers aren't doing much of the seasonal hiring they typically do this time of year. More below ...

"This is the time of year when retail jobs are supposed to be as plentiful as holiday cheer, when stores gear up for the Christmas rush by filling their sales floors with college students, moonlighters and anyone else looking to shore up their income.

"But no one is feeling very jolly this year.

"Faced with plummeting sales and spooked shoppers, retailers have cut back on holiday hiring at a time when their pool of applicants is swelling with those who have been laid off from other industries. About 272,000 retail jobs were open at the end of September, according to government data released last week, down 24 percent from the same month last year. Those numbers are expected to drop further as retailers cut back on opening new stores and close those that don't perform well.

"It's bleak on both sides," said K.C. Blonski, director of travel, leisure and retail markets for consulting firm AchieveGlobal. "Retailers are looking at the cost of adding to their labor pool. The jobs are little and far between."

"Even those who have jobs are not unscathed. Managers at restaurants throughout the Washington region say they not only are reducing staff through attrition, but they are also cutting hours. Some servers say they are getting fewer tips because fewer people are dining out and those who do have become more stingy.

"For Rick and Nina Ivey, owners of 15 Virginia Barbeque restaurants, the contracting economy means a halt in hiring even though a flurry of people in their 30s and 40s have asked about entry-level jobs. For 18-year-old Megan Waters of Annapolis, it means applying at 14 stores before landing a job at California Tortilla. And for a national retailer like Best Buy, it means nearly 1 million applicants for no more than 20,000 seasonal jobs, a 20 percent increase in applicants over previous years.

"The national unemployment rate reached 6.5 percent in October, according to government data, and some analysts are projecting that it will climb to 7.3 percent next year after hovering between 4 and 5 percent for about three years. There were 1,330 mass layoffs during the third quarter that affected nearly 220,000 workers, spurred largely by slowing demand for consumer goods -- and leaving many of those affected to turn to the retail and restaurant sector as they scramble to make ends meet this holiday season."

Meanwhile, reports of big bank layoffs continue to trickle out. Citigroup is planning to let 50,000 workers go through a combination of attrition, layoffs and asset sales. The company has already slashed 23,000 jobs. JPMorgan is also reportedly looking at thousands of job cuts. And other firms, including Goldman Sachs and Morgan Stanley, are already in the process of implementing their own cuts.

Lots of credit crunch coverage to chew through

Looking for some credit crunch news to peruse while you sip your morning coffee? There's plenty of it today...

The Washington Post covers how consumers are having their credit lines cut ...

"Cecil Bello has stumbled into a new corner of the credit squeeze. The 32-year-old management consultant has had the limits reduced on three of her credit cards.

"In September, U.S. Bank notified the Fairfax County resident that she no longer had a $14,500 limit on a card that had a balance of about $5,000. Her new limit left her just $500 from being maxed out, she said.

"Then came an Oct. 26 letter from American Express that said she now had a limit of $14,000, down from $22,000. That letter said her "total debt is too high relative to your payment history with us and other creditors."

"Early this month, she received an e-mail from American Express notifying her that another card with a $5,000 limit had been reduced to $3,000 and that her new cash advance limit was down to $200."

The Post also covers how states are lining up for bailout money from D.C. too ...

"First came the banks looking for a federal rescue plan to stay afloat. Next it was the automakers seeking a bailout. And now state governments say they, too, need emergency federal assistance to remain solvent.

"I believe that the crisis that is happening in the states needs to be elevated in the national discussion about restoring our economy," said California state Assembly Speaker Karen Bass (D). "California is the world's sixth-largest economy. And just as we cannot let the auto industry fail, we can't let the state of California fail."

"The National Governors Association has sent a letter to congressional leaders asking for immediate action to aid states. New York Gov. David A. Paterson (D) has urged federal assistance, telling Congress in recent remarks, "We are cutting all we can, and we will cut all that we are able to, but inevitably, the deficit is too voluminous for us to address." He added, "Targeted, sensible action by the federal government could provide relief for us now."

"California Gov. Arnold Schwarzenegger (R) also demanded federal action, blaming the subprime mortgage crisis for the economic downturn. "Government is really at fault, and this is why government has to get us out of this mess now and figure out very quickly how to get us out of it," he said. "And I'm talking about Washington."

And at the New York Times, you can read about how bankruptcy filings are rising fast -- and how those who are filing are doing so with much larger debt loads than in the past ...

"The economy’s deep troubles are pushing a growing number of already struggling consumers into bankruptcy, often with far more debt than those who filed in previous downturns.

"Plummeting home values, dwindling incomes and the near disappearance of credit have proved a potent mixture. While all the usual reasons that distressed borrowers seek bankruptcy — job loss, medical bills, divorce — play significant roles, new economic forces are changing the calculus of who can ride out the tough times and who cannot.

"The number of personal bankruptcy filings jumped nearly 8 percent in October from September, after marching steadily upward for the last two years, said Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company.

"Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005. That translated to an average of 4,936 bankruptcies filed each business day last month, up nearly 34 percent from October 2007."

Puzzling move in the insurance sector

So let me see if I understand this: There are some concerns in the marketplace about insurance company solvency. There are worries about whether life insurers and other insurers are going to be able to live up to their commitments. So in response, regulators are ... considering EASING capital requirements? That sounds like a confidence-instilling move to me. From the Wall Street Journal …

"At the prompting of a major life-insurance trade group, state insurance regulators are considering moves to loosen capital requirements for the battered industry, a development that could buoy companies but also could raise concerns about consumer protection.

"State regulators impose steep capital requirements on life insurers to help make sure the companies can deliver on customer commitments. But as stock markets have sunk, insurers appear increasingly likely to need billions of additional dollars to satisfy those requirements. And the decline in their own stock prices makes it more difficult to raise capital.

"Let's be honest, we're in new territory here," said Susan Voss, commissioner of insurance in Iowa and secretary-treasurer of the National Association of Insurance Commissioners, in an interview Thursday. "We want to be as nimble as possible and address these issues."

"She added: "I can tell you, we won't do anything that puts our consumers in a vulnerable position. It's a balancing act."

"The balance concerns keeping requirements steep enough to protect consumers, while not so steep as to damage insurers.

"Ms. Voss says NAIC's leadership generally agrees with the American Council of Life Insurers, which submitted the proposals this week, that the conservative accounting used for regulatory purposes contains reserve redundancies, and some could be eliminated without hurting policyholders."

Retail sales worst ever

I'm not sure anyone is too surprised, but October retail sales were ugly. Really, really ugly. Total sales fell 2.8% on the month against expectations for a drop of 2.1%. Strip out autos and you get a 2.2% decline, much worse than the 1.2% forecast. In fact, the 2.8% drop was the fourth in a row -- the longest stretch of declines on record. It was also the single-largest monthly drop recorded since the Commerce Department started tracking the measure in 1992.

Please make it stop ...

Looks like a broader swath of corporate America wants to get its hands on the Fed's dough, according to Bloomberg. Sigh. Remind me again how long ago it was that I asked the simple question: "When is enough, enough?" More below ...

"A group of companies including Textron Inc., Home Depot Inc. and Honda Motor Co. are pressing the Federal Reserve to expand purchases of commercial paper to include them, two people briefed on the matter said.

"The group is asking the Fed to buy short-term paper with the second-highest debt rating, the people said on condition of anonymity. Other members of the effort include Dow Chemical Co.
and Nissan Motor Co., they said. The program, set up last month, now only takes the most highly rated securities.

"While accepting lower-grade debt could reduce borrowing costs for a broader group of companies, it would also expose the taxpayer to greater risk. The request is one of a number of attempts to get a share of federal rescues, with industries from automakers to heating-oil retailers seeking funds.

"Top-tier issuers are benefiting," while those that sell lower-rated paper are losing out because of the Fed's decision, said Garret Sloan, a short-term debt analyst at Wachovia Corp. in Charlotte, North Carolina.

"Second-tier issuers of commercial paper, debt that matures in nine months or less and is a form of IOU for day-to-day expenses such as payrolls and rent, argue they're disadvantaged by the Fed's new Commercial Paper Funding Facility.

"Interest rates on the highest-ranked 30-day commercial paper fell to 1.04 percent today from as high as 4.28 percent on Oct. 9. By contrast, the rates on second-tier debt were 5.36 percent, compared with a high of 6.30 percent on Oct. 15."

Where is all the money going?

That's a question I'm seeing more people ask, and for good reason. Bloomberg News has been on a little bit of a crusade to find out what the Fed is doing with our money, for instance, and I for one hope they gain some traction. See the following excerpt:

"Members of Congress, taxpayers and investors urged the Federal Reserve to provide details of almost $2 trillion in emergency loans and the collateral it has accepted to protect against losses.

At least five Republican members of Congress yesterday called for the Fed to disclose which financial institutions are borrowing taxpayer money and what troubled assets the central bank is accepting as collateral. More than 300 more investors and taxpayers also pressed for more disclosure in e-mails and interviews with Bloomberg News.

"There cannot be accountability in government and in our financial institutions without transparency,'' Texas Senator John Cornyn said in a statement. "Many of the financial problems we are facing today are the direct result of too much secrecy and too little accountability.''

"House Republican Leader John Boehner and Republican Representatives Jeb Hensarling of Texas, Scott Garrett of New Jersey and Walter Jones of North Carolina also are pressing Fed Chairman Ben S. Bernanke to elaborate on the Fed's emergency lending. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in the separate $700 billion bailout of the banking system that was approved by Congress last month.

"European Central Bank President Jean-Claude Trichet today urged greater disclosure to help strengthen the global financial system.

"Despite all regulatory advances and progress in information technology, the financial system has been characterized by a lack of transparency about the ultimate allocation of risks,'' Trichet wrote in today's Financial Times, citing as examples "the sheer complexity of structured financial products, which even sophisticated investors are not able to assess properly, and the lack of regulation of certain financial institutions."

"Bloomberg News has sought records of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure."

Then there's the Washington Post story today about the lack of oversight of how the TARP bailout money is being spent. Is the bailout proving to be a case of Ready, Fire, Aim? Only time will tell. But the way we keep lurching from crisis to crisis, from bailout plan to bailout plan, isn't exactly encouraging. More below ...

"In the six weeks since lawmakers approved the Treasury's massive bailout of financial firms, the government has poured money into the country's largest banks, recruited smaller banks into the program and repeatedly widened its scope to cover yet other types of businesses, from insurers to consumer lenders.

"Along the way, the Bush administration has committed $290 billion of the $700 billion rescue package.

"Yet for all this activity, no formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste. Nor has the first monitoring report required by lawmakers been completed, though the initial deadline has passed.

"It's a mess," said Eric M. Thorson, the Treasury Department's inspector general, who has been working to oversee the bailout program until the newly created position of special inspector general is filled. "I don't think anyone understands right now how we're going to do proper oversight of this thing."

"In approving the rescue package, lawmakers trumpeted provisions in the legislation that established layers of independent scrutiny, including a special inspector general to be nominated by the White House and a congressional oversight panel to be named by lawmakers themselves.

"Some lawmakers and their aides fear that political squabbling on Capitol Hill and bureaucratic logjams could delay their work for months. Meanwhile, the Congressional Budget Office, which also has some oversight responsibilities, is worried about the difficulty of hiring people who can understand the intensely complicated financial work involved."

The TARP gets a makeover

Remember that whole thing about buying up billions of dollars in crummy assets and securities to shore up the banking system? To restore confidence in the market for securitized assets? And to establish clearing prices (possibly above-market prices) for some of this paper, thereby allowing institutions to start marking UP their assets rather than marking them down?

Never mind. We're shifting our focus elsewhere. At least, that's what Treasury Secretary Henry Paulson essentially said today. More details below ...

... from the Washington Post:

"U.S. Treasury Secretary Henry M. Paulson Jr. said he wants to expand the government's $700 billion bailout program to include credit card, student loan and car loan companies, part of an effort to ensure that households and businesses have access to a broad array of borrowing options.

"In a speech this morning, Paulson laid out his priorities for some $350 billion of the bailout fund that remains uncommitted. Much of the first half was used for direct capital investments into banks.

"At least some of the the remainder, Paulson said, should be used to reinvigorate the market for credit cards, student and auto loans -- which combined account for some 40 percent of consumer credit.

"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.

"His comments amount to a significant shift in the use of the bailout fund from a program to remove troubled loans from the books of financial institutions, and into an effort to support household and business spending at a time when both are in decline.

"Paulson said that the original plans for the Troubled Asset Relief Program -- to buy bad mortgage loans from banks -- has now been shelved in favor of other uses for the money.
Originally "the focus was buying illiquid assets," but now "this is not going to be the focus," Paulson said. In planning how to use the rest of the TARP funds, Paulson said that supporting consumer lending emerged as one of the top priorities."

... and from the Wall Street Journal:

"Secretary Henry Paulson said the Treasury has put a plan to purchase illiquid mortgage-related assets on hold.

"Meanwhile, the Treasury Department, signaling a new phase in its $700 billion financial-rescue plan, is considering requiring that firms seeking future government money raise private capital in order to qualify for public assistance, according to people familiar with the matter.

"The move isn't expected to apply to the existing $250 billion capital-purchase program, which is already injecting money into banks. But Treasury is considering attaching such conditions to any of its future capital investments, these people said.

"We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments," Treasury Secretary Henry Paulson said in a broad speech on the Troubled Asset Relief Program, known as TARP, the global credit crunch and the government's recent steps to address the financial meltdown. "In developing a potential matching program; broadening access in this way would bring both benefits and challenges."

"At the same time, Treasury is unlikely to conduct any auctions to purchase bad loans and other troubled assets -- the original intention of the $700 billion rescue plan. Instead, Treasury is expected to continue focusing its firepower on injecting capital directly into the financial sector, these people said.

"Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending," he said, according to his prepared remarks.

"House Financial Services Chairman Barney Frank (D., Mass.) said that Treasury disagreed with the plan to put asset purchases on hold. "We have a need to use that funding" for that purpose, Mr. Frank said at a hearing on Capitol Hill. Mr. Frank noted that Congress gave Treasury explicit authority to buy up mortgage-backed securities and whole mortgage loans as part of TARP.

"Treasury has just $60 billion left in its rescue fund, and either the current or next administration will have to turn to Congress to request the second half of the promised $700 billion. Treasury has so far committed $250 billion to banks and is spending an additional $40 billion to buy preferred shares in American International Group Inc., the big insurer.

"Treasury is expected to widen its program to inject capital into smaller, closely held banks, and is considering expanding its rescue to other nonbank financial institutions, such as insurers and specialty-finance companies. It may also do another round of financing for publicly traded banks. In addition, Treasury is under increasing pressure from Democrats in Congress to open the program to the ailing auto sector."

Regulators to banks: Go out and make some loans already

There was an interesting new statement from the major banking regulatory agencies this morning. The gist: Please, please, please make some freaking loans already! I can't recall ever seeing a statement like this, truth be told. The complete text follows ...

"The Department of the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve have recently put into place several programs designed to promote financial stability and to mitigate procyclical effects of the current market conditions. These programs make new capital widely available to U.S. financial institutions, broaden and increase the guarantees on bank deposit accounts and certain liabilities, and provide backup liquidity to U.S. banking organizations. These efforts are designed to strengthen the capital foundation of our financial system and improve the overall functioning of credit markets.

"The ongoing financial and economic stress has highlighted the crucial role that prudent bank lending practices play in promoting the nation's economic welfare. The recent policy actions are designed to help support responsible lending activities of banking organizations, enhance their ability to fund such lending, and enable banking organizations to better meet the credit needs of households and business. At this critical time, it is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met. As discussed below, to support this objective, consistent with safety and soundness principles and existing supervisory standards, each individual banking organization needs to ensure the adequacy of its capital base, engage in appropriate loss mitigation strategies and foreclosure prevention, and reassess the incentive implications of its compensation policies.

Lending to creditworthy borrowers

"The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a result of problems in financial markets, the economy will likely become increasingly reliant on banking organizations to provide credit formerly provided or facilitated by purchasers of securities. Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole.

"It is essential that banking organizations provide credit in a manner consistent with prudent lending practices and continue to ensure that they consider new lending opportunities on the basis of realistic asset valuations and a balanced assessment of borrowers' repayment capacities. However, if underwriting standards tighten excessively or banking organizations retreat from making sound credit decisions, the current market conditions may be exacerbated, leading to slower growth and potential damage to the economy as well as the long-term interests and profitability of individual banking organizations. Banking organizations should strive to maintain healthy credit relationships with businesses, consumers, and other creditworthy borrowers to enhance their own financial well-being as well as to promote a sound economy. The agencies have directed supervisory staffs to be mindful of the procyclical effects of an excessive tightening of credit availability and to encourage banking organizations to practice economically viable and appropriate lending activities.

Strengthening capital

"Maintaining a strong capital position complements and facilitates a banking organization's capacity and willingness to lend and bolsters its ability to withstand uncertain market conditions. Banking organizations should focus on effective and efficient capital planning and longer-term capital maintenance. An effective capital planning process requires a banking organization to assess both the risks to which it is exposed and the risk management processes in place to manage and mitigate those risks; evaluate its capital adequacy relative to its risks; and consider the potential impact on earnings and capital from economic downturns. Further, an effective capital planning process requires a banking organization to recognize losses on bank assets and activities in a timely manner; maintain adequate loan loss provisions; and adhere to prudent dividend policies.

"In particular, in setting dividend levels, a banking organization should consider its ongoing earnings capacity, the adequacy of its loan loss allowance, and the overall effect that a dividend payout would have on its cost of funding, its capital position, and, consequently, its ability to serve the expected needs of creditworthy borrowers. Banking organizations should not maintain a level of cash dividends that is inconsistent with the organization's capital position, that could weaken the organization's overall financial health, or that could impair its ability to meet the needs of creditworthy borrowers. Supervisors will continue to review the dividend policies of individual banking organizations and will take action when dividend policies are found to be inconsistent with sound capital and lending policies.

Working with mortgage borrowers

"The agencies expect banking organizations to work with existing borrowers to avoid preventable foreclosures, which can be costly to both the organizations and to the communities they serve, and to mitigate other potential mortgage-related losses. To this end, banking organizations need to ensure that their mortgage servicing operations are sufficiently funded and staffed to work with borrowers while implementing effective risk-mitigation measures.

"Given escalating mortgage foreclosures, the agencies urge all lenders and servicers to adopt systematic, proactive, and streamlined mortgage loan modification protocols and to review troubled loans using these protocols. Lenders and servicers should first determine whether a loan modification would enhance the net present value of the loan before proceeding to foreclosure, and they should ensure that loans currently in foreclosure have been subject to such analysis. Such practices are not only consistent with sound risk management but are also in the long-term interests of lenders and servicers, as well as borrowers.

"Systematic efforts to address delinquent mortgages should seek to achieve modifications that result in mortgages that borrowers will be able to sustain over the remaining maturity of their loan. Supervisors will fully support banking organizations as they work to implement effective and sound loan modification programs. Banking organizations that experience challenges in implementing loss mitigation efforts on their mortgage portfolios or in making new loans to borrowers should work with their primary supervisors to address specific situations.

Structuring compensation

"Poorly-designed management compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization. Management compensation policies should be aligned with the long-term prudential interests of the institution, should provide appropriate incentives for safe and sound behavior, and should structure compensation to prevent short-term payments for transactions with long-term horizons. Management compensation practices should balance the ongoing earnings capacity and financial resources of the banking organization, such as capital levels and reserves, with the need to retain and provide proper incentives for strong management. Further, it is important for banking organizations to have independent risk management and control functions.

"The agencies expect banking organizations to regularly review their management compensation policies to ensure they are consistent with the longer-run objectives of the organization and sound lending and risk management practices.

"The agencies will continue to take steps to promote programs that foster financial stability and mitigate procyclical effects of the current market conditions. However, regardless of their participation in particular programs, all banking organizations are expected to adhere to the principles in this statement. We will work with banking organizations to facilitate their active participation in those programs, consistent with safe and sound banking practices, and thus to support their central role in providing credit to support the health of the U.S. economy."

In NYC ...

Just a quick note to let you all know I haven't dropped off the face of the earth ... yet. I'm actually in New York City attending a seminar and have been very busy with related work. I hope to be back online with more posts tomorrow.

Overseas central banks shift into high gear

The focus this morning in the interest rate world is on global central banks. For instance, the Bank of England just stepped up with a larger-than-expected 150 basis point cut. The move lowers the U.K.'s base rate to 3%. Economists were generally expecting a move of only 75 basis points.

Switzerland's central bank also threw its hat into the ring with a 50-point cut to 2% in its base rate. The Swiss National Bank wasn't scheduled to make any interest rate moves until its next meeting in December.

Finally, the European Central Bank lived up to market expectations by cutting rates 50 points to 3.25%.

Get out and vote

Nothing is more inspiring than spending 20 or 30 minutes (or more!) in line to vote on Election Day, in my opinion. So whomever you support, make sure you get out and vote today.

Fed survey: Tightening, tightening everywhere

The Federal Reserve just released its latest Senior Loan Officer Opinion Survey on Bank Lending Practices. Don’t let the jargony-sounding name fool you. This is a big report because it gauges the demand for a wide variety of loans, as well as the willingness of banks to supply them on reasonable terms. The latest report includes responses from 55 domestic institutions and 21 foreign banks with operations in the U.S. It makes clear that banks are in "hunker down" mode on the credit front.

Some details:

* 83.6% of the lenders surveyed said they were tightening standards on commercial loans to large- and medium-sized borrowers. That was up from 57.6% in the third quarter and the highest level the Fed has EVER found. The survey dates back to 1990.

* Business borrowers who are lucky enough to find a bank willing to make them a loan are paying much more to get their money, too. A whopping 98.2% of those institutions surveyed said they were increasing the “spread” between the rates they charge corporate borrowers and their own cost of funds. That’s up from 80.8% a quarter earlier and the highest ever.

* On the real estate front, there was plenty of bad news to go around. A net 87% of lenders surveyed said they were tightening lending standards on commercial real estate loans. That was up from 80.7% a quarter earlier and ... you guessed it ... the highest ever.

* What about residential mortgages? Every single lender polled – 100% -- said they had tightened standards on subprime loans, up from 85.7% a quarter earlier. The percentage of lenders tightening standards on so-called “nontraditional” mortgages (those made to borrowers with less income documentation, interest only loans, and so on) jumped to 89.7% from 84.4%.

These were the highest readings since the Fed began splitting out the mortgage category by type of loan. The only break was in conventional mortgages, where the net tightening percentage slipped slightly to 69.2% from 74%. That was still the second-highest reading on record (using the "all mortgage" category as a proxy prior to Q2 2007).

* As for consumer credit, there was a slight improvement quarter over quarter. The percentage of lenders tightening standards on credit card loans dipped to 58.8% from 66.6%, while the net tightening measure for other consumer loans slipped to 64.2% from 67.4%. But those are still the second-worst readings on record behind the third quarter of this year (the data in this category goes back to 1996).

* Moreover, more and more banks aren’t willing to make consumer loans at all. Some 47.2% of those surveyed said they were either somewhat or much less willing to make consumer loans, up from 34% a quarter earlier. That was the worst reading on record. About 48.1% of those polled said they were seeing less demand for consumer loans, the worst reading in that category on record as well.

Dismal data deluge continues

Another day, another batch of dismal economic data. This time it's the ISM Manufacturing index. It came in at 38.9 in October, down from 43.5 in September and below forecasts for a reading of 41. That's the worst ISM reading going all the way back to September 1982. In case you're wondering, the worst reading ever (my data goes back 60 years) was 29.4 in May 1980.

Digging deeper into the report, the ISM subindex measuring new orders dropped to 32.2 from 38.8. The subindex measuring employment fell to 34.6 from 41.8. And the subindex measuring production dropped to 34.1 from 40.8.

Meanwhile, in the beleaguered auto sector, Ford reported that sales plunged 30% from a year earlier in October. Sales fell 23% at Toyota and 33% at Nissan. Auto sales are down 12 months in a row, the longest consecutive stretch of declines in 17 years.

UPDATE: GM just released its October sales -- down a whopping 45% YOY. Reportedly, the company is going to launch its annual "Red Tag" holiday sales event tomorrow rather than in mid-November like it usually does. Not exactly "Christmas in July," of course. But clearly GM is trying to get people into the holiday spending spirit earlier than usual this year. That's a tough sell given the state of the U.S. economy.