Five-year auction bombs

Yesterday's record 2-year Treasury Note auction went off fairly well. Today's 5-year auction? Not so much. The Treasury tried to sell a record $39 billion of notes. Pre-auction talk was for the notes to sell at a yield of 2.635%. Instead, they went off at 2.689%, more than 5 basis points higher. The bid-to-cover ratio fell to 1.92 from 2.58 at the last auction. In fact, that was the worst since September 2008. Indirect bidders took down just 36.7% of the notes sold, down from 62.8% and the lowest since April. Bond futures dropped sharply on the news from pre-auction trade around 116 24/32 to as low as 115 16/32.

China takes a hit ... orders fall ... commercial RE losses mount

Lots to cover this morning, so I'll try to be brief ...

First, China's Shanghai Composite Index dropped 5% overnight, the biggest decline in eight months. That may not sound like much because the darn thing has soared 79% so far this year. But the reason for it is worth noting: The government appears to be nervous about frothiness in the market and may clamp down. What kind of frothiness? Well, how about the fact that a Chinese home building firm IPO'd today ... and racked up a 56% first-day gain. Or the fact that a million Chinese stock trading accounts were opened in just two weeks in July, the most since January 2008. Ah to be young, in love, and putting in indications of interest on profitless Internet stocks. Those were the days.

Second, durable goods orders fell by a relatively steep 2.5% in June, compared with expectations for a drop of 0.6%. Strip out transportation orders, however, and you get a 1.1% gain. Economists were looking for an unchanged reading. A key gauge of business investment in the report rose 1.4% after a 4.3% rise in May.

Third, a report from Real Capital Analytics provides some interesting perspective on commercial real estate. RCA says about $2.2 trillion of U.S. commercial properties that were either purchased or refinanced since 2004 are now worth less than their original price. Some $1.3 trillion have declined so much the buyer's down payment has been wiped out or will be soon. Oh, and those figures don't even include one of the worst sub-categories in CRE -- hotels. Instead, the report covers office, industrial, multifamily, and retail. I've been saying for a while that residential real estate is stabilizing. CRE? Not so much.

S&P/Case Shiller: Home prices down 17.1% in May

The latest home price figures from S&P/Case-Shiller just hit the tape. They showed a 17.1% year-over-year decline in the 20 cities tracked by the research group. That was smaller than the 17.9% forecast of economists polled by Bloomberg. It was also down from 18.1% a month earlier.

On a month-over-month basis, prices rose 0.45%, the first monthly increase since July 2006. I should note that I'm not a big fan of monthly numbers; You really want to follow year-over-year trends as they eliminate the impact of seasonality. Prices are still falling in every city from a year earlier, with the smallest decline in Dallas at -4.1% and the biggest drop in Phoenix at -34.2%.

New home sales surge 11% in June

June new home sales figures were released this morning. Here's a recap of what they showed:

* New home sales surged 11% to a seasonally adjusted annual rate of 384,000 from 346,000 in May. That was stronger than the average forecast of economists polled by Bloomberg, who were expecting 352,000 sales. Regionally, sales rose 22.6% in the West, gained 29.2% in the Northeast, and shot up 43.1% in the Midwest. Sales dipped 5.3% in the South.

* The raw number of homes for sale continued to decline, falling to 281,000 from 293,000 in May. That's the lowest reading going back to February 1998. The months supply at current sales pace indicator of inventory slumped to 8.8 months from 10.2.

* The median price of a new home fell 5.8% last month to $206,200 from $219,000 in May. On a year-over-year basis, prices dropped 12%, the biggest YOY decline since February.

What's happening in the new housing market? Falling prices are generating more sales and clearing out the inventory glut. Specifically, prices declined 12% from a year earlier in June. That was the biggest annual drop since February. Sales spiked 11%, while the raw number of homes on the market dropped to the lowest level in 11 years.

The existing home market is struggling a bit harder, thanks to a continuing influx of foreclosed and delinquent properties. But overall, the tone of the housing news is generally improving. That's a welcome sign after so many quarters of disappointment.

June existing home sales climb 3.6%

The housing market data has taken on an improving tone of late. The June existing home sales report was no exception. Let's get to the details ...

* Existing home sales gained 3.6% to a seasonally adjusted annual rate of 4.89 million units from a downwardly revised 4.72 million in May. That was roughly in line with forecasts for a reading of 4.84 million and roughly unchanged from 4.9 million a year earlier. It's also the highest level since October.

* Single-family sales rose 2.4%, while condo and cooperative sales surged 14%. By region, sales rose across the board. They inched up 0.9% in the Midwest, rose 2.5% in the Northeast, climbed 4% in the South, and jumped 6.4% in the West.

* The raw number of homes for sale dipped 0.7% to 3.823 million units from 3.851 million in May. That was also good for a drop of 14.9% from a year earlier. The months supply at current sales pace indicator of inventory fell to 9.4 from 9.8. Single family inventory dipped to 8.9 from 9.1 and condo inventory slumped to 13.4 from 15.6.

* The median price of an existing home climbed 4.1% to $181,800 from $174,700 in May. That was down 15.4% from $215,000 in the year-ago period.

Less bad. That's how I'd describe the housing market. We're seeing sales rates steadily and gradually climb at the same time the supply of homes for sale is falling. We're also seeing the pace of home price declines ease up. None of this is great news. But it's a noticeable -- and welcome -- change from the freefall we witnessed in 2007 and 2008. The stabilization stems from several factors: Home affordability has improved in many markets to the point that buyers are being enticed off the sidelines. The government is continuing to subsidize the flow of mortgage credit. And economic deterioration has moderated.

Bernanke on exit strategies

Interesting timing, to say the least. As "Helicopter" Ben Bernanke heads to the Hill for a couple days of grilling, the Wall Street Journal is publishing an op-ed from the Fed Chairman about "exit strategies." Bernanke tries to lay out the case that the Fed will pull back on all its extraordinary accommodation when and if it makes sense to do so. But as he adds in his conclusion (below), that isn't going to happen any time soon ...

"Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability."

What do you think? Do you think Bernanke will really live up to his word? Or do you think we'll end up with another disaster like Greenspan's too little, too late hiking strategy in 2004-2005 (which helped ignite the final leg in the housing bubble)?

Housing starts, permits pop in June

The latest figures on home construction just hit the tape. Here's a rundown ...

* Total housing starts came in at 582,000 in June, up 3.6% from an upwardly revised 562,000 in May. Permitting activity also climbed -- 8.7% to 563,000 from 518,000 a month earlier. Starts haven't been higher than this since November..

* By property type, single family construction activity rose 14.4%, while multifamily construction dropped 25.8%. Single family permits rose 5.9%, while multifamily permits rose 18.8%. The increase in single family building was the biggest since December 2004.

* Regionally, starts rose 28.6% in the Northeast and 33.3% in the Midwest. Starts fell 1.4% in the South and 14.8% in the West. Permitting activity was up in all four regions, with the South leading the way at 13.9% and the West showing the weakest growth at 1.9%.

For some time, I've mentioned that the housing market is showing signs of stabilization. Not a robust recovery, but an end to the "cliff diving" we saw in 2007 and 2008. This phase will be marked by ongoing price declines in many locales, albeit more gradual ones. We will also see a gradual stabilization in sales rates ... a gradual decline in the level of inventory for sale ... and a gradual bottoming out of construction activity. Today's starts and permitting figures fit with this projection, as did yesterday's NAHB report on builder optimism.

Again, though, the word to emphasize is "gradual." The new home industry has done a good job of reducing supply -- with inventory for sale now in line with the long-term average. But the existing home market is still vastly oversupplied, and we continue to be inundated with an influx of distressed and foreclosed properties. That means anyone hoping for a robust "V"-shaped recovery is likely to be disappointed.

NAHB index climbs in July

The latest National Association of Home Builders index figures were just released. The index climbed to 17 in July from 15 in June. That was a point better than the forecast of 16 and the highest reading since September.

Behind the headlines, the sub-index that tracks present sales rose to 17 from 14, the sub-index measuring expectations about future sales held steady at 26, and the sub-index measuring buyer traffic inched up to 14 from 13. Regionally speaking, the index dropped to 16 from 19 in the Northeast, held steady at 14 in the Midwest and 15 in the West, and spiked to 20 from 15 in the South.

For some time, I've mentioned that the housing market is showing signs of stabilization. Not a healthy recovery, mind you, just an end to the cliff diving we saw in 2007 and 2008. This phase will be marked by ongoing price declines in many locales (albeit more gradual ones) ... a gradual stabilization in sales rates ... and a gradual decline in the level of inventory for sale. Speaking of the supply situation, the new home market is much farther along than the existing home market, which is still being inundated with an influx of foreclosed properties.

Again, those hoping for a robust "V"-shaped recovery are likely to be disappointed. After all, rising unemployment and tight lending standards remain significant headwinds. But relatively low mortgage rates and improved consumer sentiment are helping to offset those forces to a degree. Or in simple terms, the days of housing Armageddon are behind us.

Lots to chew on this morning -- on foreclosures, the economy, and more

I feel like it's Thanksgiving afternoon, with a feast of stories to chew on today. In no particular order ...

* The government is finally going to allow one of these ne'er-do-well financial firms fail, apparently. I'm talking about CIT Group, the commercial lender that's been struggling for months. Apparently, the Treasury, Federal Reserve and especially the FDIC have denied its request for more aid -- which could precipitate a bankruptcy filing as soon as the next couple of days. CIT has lost $3.4 billion over the past eight quarters; it has already received about $2.3 billion in bailout money.

* Initial jobless claims fell to 522,000 from 569,000 in the most recent week. There was a huge drop in continuing claims -- from 6.915 million to 6.273 million -- but some of that may be seasonal distortions related to the July 4 holiday and auto production shutdowns. The news follows a better-than-expected reading on the Empire manufacturing index for July (-0.6 vs. a forecast of -5) yesterday. Industrial production fell at the slowest pace (-0.4%) in June in eight months, but capacity utilization plunged to a record low of 68%.

* The foreclosure problem continues unabated. RealtyTrac data showed monthly filings climbing 4.6% between May and June to 336,173. That's just shy of April's record high (342,038). On a year-over-year basis, filings were up 33.2%. The hardest hit areas are the ones you would expect -- parts of California, Florida, and especially Nevada. In Nevada, a whopping 1 in 16 households were hit by at least one kind of filing in the first half of 2009.

* Speaking of foreclosures, we continue to see reports from various media outlets about how difficult it has been for lenders to rework loans, despite prodding from government officials. The Wall Street Journal tackles the topic this morning, focusing on Morgan Stanley's Saxon Mortgage Services arm. It's a good read if you have time. And if you're looking for figures on the size and scope of the problem, the Journal notes the following:

"New foreclosure notices will total 2.4 million this year, which could trigger price drops in 69.5 million nearby homes, estimates the Center for Responsible Lending, a financial-services research and policy firm. At an average decline of $7,200 a house, that translates to a potential drop of $502 billion in total U.S. property values."

* On the credit front, there's been a mixture of moderately better and worse news. Credit card trust reports yesterday from the likes of American Express and Capital One showed some improvement in delinquency rates. On the other hand, JPMorgan Chase CEO Jamie Dimon is forecasting worsening commercial real estate market conditions on that firm's conference call. So I guess the way you interpret the news depends on if you're an optimist or pessimist. Clearly the stock market has been very optimistic the past few days!

More record-setting deficit figures to chew on

Hope everyone is having a decent Monday. One item that's worth noting this afternoon is the latest budget update from the U.S. Treasury. Turns out the June deficit came in at $94.3 billion, the first time there's been a deficit for that month since 1991. It's also the largest June deficit ever. The year-to-date tally of red ink? A record $1.1 trillion in the first nine months of the fiscal year that ends September 30, 2009.

Mortgage mods not keeping up with expectations

I said back when the Obama administration's mortgage modification programs were being rolled out that they would likely NOT meet the ambitious expectations spelled out by policymakers. There are several reasons why mortgage servicers and investors are not as willing (or able) to modify loans as aggressively as the politicians want them to. A great Federal Reserve Bank of Boston paper (PDF link) chronicled some of them a few days ago. Here is the abstract from that paper (emphasis is mine):

"We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment-reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securitization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small, and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors."

Now, the Wall Street Journal is weighing in, noting that HUD and Treasury are putting pressure on the servicing industry to get with the program. Here's an excerpt from that story:

"More than 270,000 borrowers have received modification offers under the program. But housing counselors complain many borrowers are waiting for help as mortgage-servicing companies get up to speed. The administration has said its program could help as many as four million homeowners.

"The administration has "started to see a significant ramp-up" in modification activity, the letter said. But it added, "there appears to be substantial variation among servicers in performance and borrower experience." It called on mortgage-servicing companies to beef up staffing and training, and to provide "an escalation path for borrowers dissatisfied with the service they have received." Freddie Mac, which serves as compliance agent for the program, will be developing a "second look" process in which it will audit a sample of rejected modification applications, the letter said.

"The letter also called on mortgage companies to suggest ways the administration can improve the program's design.

"Housing counselors say they have been disappointed by the lack of progress under the administration's program. "We are not getting anywhere near the level of resolutions we expected," said Bruce Dorpalen, national director of housing counseling for Acorn Housing Corp., which works with financially troubled borrowers. "The real issue is that generally the servicers are not up to speed."

Yen-dollar exchange rate goes berserk

To all you currency market watchers out there, how about that yen/dollar exchange rate? The yen is flying against the buck, moving up by as much as 3 yen or so to 91.81 (The chart above shows the yen futures). On a percentage basis, this is the biggest gain for the yen that I can find on any day since early October 2008. Do I really need to remind you all what was happening back then? Bottom line: This currency pair has been a key indicator of risk appetite, and the massive move today through key technical levels could presage another bout of fear/panic in the markets. My two cents anyway.

ABA: Record loan delinquencies in Q1

The American Bankers Association just released its latest look at quarterly delinquencies for a wide variety of consumer credit products. Here's a peek at what the group's numbers showed:

* The composite index that tracks delinquencies on all products rose to 3.23% in Q1 2009. That was up ever so slightly from 3.22% a quarter earlier, and a fresh record high (The ABA's figures go back to 1974). On a dollar value basis, the delinquency rate also rose to a record 3.35% from 3.16% a quarter earlier.

* Credit card late payments rose to 4.75% from 4.52% a quarter earlier. On a dollar value basis, delinquencies jumped to a record 6.6% from 5.52%.

* DQs on closed end home equity loans rose to 3.52% from 3.03%. That's the highest on record. DQs on revolving home equity lines of credit climbed to a record 1.89% from 1.46%. Delinquencies on direct auto loans (those obtained by the consumer directly from a bank) rose to 3.01% from 2.03%, while DQs on indirect auto loans (those obtained from a dealer, but funded by a bank behind the scenes) dipped to 3.42% from 3.53%.

The credit crisis that began in the subprime mortgage sector has long since spread to the rest of the lending industry. The latest ABA figures show record delinquencies on closed-end home equity loans, record delinquencies on open-ended home equity lines of credit, and record delinquencies on credit cards (when measures in dollar volume terms). Meanwhile, delinquencies remain elevated on auto loans, personal loans, and even mobile home loans. Unless and until the job market stabilizes, we can expect to see ongoing deterioration in consumer credit quality -- and more resulting pain for the lending industry as a whole.

Looking at the bigger picture, Americans simply borrowed and spent too much during the halcyon days of the early-to-mid 2000s. They were counting on ever-rising home values to bail them out from high-risk loans. The lending industry actively egged them on, as did policymakers at the Fed, who kept interest rates too low for too long. Now, we are all dealing with the hugely negative consequences of this massive credit bubble. What a shame. We can only hope that borrowers, lenders, policymakers, and regulators behave more responsibly in the future.

A pair of interesting stimulus stories

Bloomberg has a great pair of stories on economic stimulus and the locus of economic power in the world. The first piece chronicles how Obama administration adviser Laura Tyson gave a speech urging a second economic stimulus package. She suggested the first stimulus was too small and that the economy "is a sicker patient" than originally thought. Here's a passage from the story:

"Obama said last month that a second package isn’t needed yet, though he expects the jobless rate will exceed 10 percent this year. When Obama signed the first stimulus bill in February, his chief economic advisers forecast it would help hold the rate below 8 percent.

"Unemployment increased to 9.5 percent in June, the highest since August 1983. The world’s largest economy has lost about 6.5 million jobs since December 2007.

“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum. “We probably have already 2.5 million more job losses than anticipated.”

"Republicans, including House Minority Leader John Boehner of Ohio, seized on the latest labor numbers to attack the Obama administration’s handling of the economy.

"Even Democrats have bemoaned the pace of the package’s implementation. House Majority Leader Steny Hoyer, a Maryland Democrat, said on “Fox News Sunday” June 5 that Congressional Democrats are “disappointed” stimulus funds weren’t distributed faster."

The second story talks about the consequences of all these stimulus packages in the leading industrialized nations. All of these countries (the U.S. included) are spending massive amounts of money they don't have, borrowing it from emerging nations. Debt as a percentage of GDP is soaring throughout the G-8. The result: The emerging world nations, as net creditors, are gaining economic power, while the developed world countries, as huge net borrowers, are losing it. An interesting read for sure.

Here's an excerpt:

"The world’s most affluent nations will take decades to work off the biggest buildup in debt since World War II. The political costs may be permanent, laid bare at this week’s Group of Eight summit of leading industrial powers.

"Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114 percent of gross domestic product in 2014, more than triple the 35 percent of the main emerging economies including China, the International Monetary Fund forecasts.

"The run-up in debt has hastened a power shift that is sapping the industrial world’s authority to impose its economic doctrine, currency arrangements or greenhouse-gas reduction strategies. Even some G-8 officials acknowledge that the group has lost its grip amid the global recession they spawned.

"The eight-nation forum that starts tomorrow in L’Aquila, Italy is “a lot less relevant given its makeup and given developments in the world,” French Finance Minister Christine Lagarde said July 5. “Big players, like emerging economies, India, China or Mexico, are invited, but they’re given only a jump seat outside of the main summit.”

"The industrial world is beset by the harshest economic conditions in a lifetime: a projected U.S. budget deficit of 13.6 percent of GDP in 2009, unmatched since World War II; an annualized 14.2 percent contraction in Japanese GDP in the first quarter, also the worst since the war; in the first three months of 2009, German exports had their steepest quarterly decline since 1970 when the data were first compiled."

Companies dump another 467,000 jobs in June

The June employment report was just released by the Labor Department. Here's what the data showed:

* Total nonfarm payrolls fell by 467,000, That was much worse than the forecast for a reading of -367,000. Net revisions to the past couple of months lowered the job loss tally by 8,000. Still, job losses were widespread in June. Construction employment dropped 79,000, manufacturing employment fell 136,000, and service-sector employment fell by 244,000. Worth noting: Government employment is also fading fast. The sector fired 52,000 people, the worst showing since July 2007.

* The unemployment rate rose to 9.5% from 9.4% in May. That was slightly better than the average forecast for a reading of 9.6%, but still the worst reading going all the way back to August 1983 (a tie).

* Average hourly earnings were a disappointment. They were unchanged, against forecasts for a reading of +0.1% and a May reading of +0.2%. That was the worst number since February 2004. Average weekly hours worked dipped again to 33 from 33.1. That's the lowest reading in the history of the data series, which goes back to 1964.

* In other employment data, initial jobless claims were right in line this week -- 614,000 vs. a forecast for 615,000 and a previous reading of 630,000. Continuing claims dipped to 6.702 million from 6.755 million a week earlier. That as a big better than forecast.

Pending home sales flatline in May

Pending home sales figures for May just hit the tape. Here's a recap:

* Pending home sales inched up 0.1% between April and May. That was essentially in line with the average forecast of economists, who were looking for no change.

* The pending sales index, at 90.7, was up 6.7% from the year-earlier reading of 85 and the highest since September.

* The regional breakdown was a mixed bag. Sales rose 2.2% in the West and 3.1% in the Northeast. But they dropped 1.3% in the Midwest and 1.7% in the South.

The housing market has put the darkest depths of last fall and winter behind it. But the recovery we've seen from those severely depressed levels isn't much to write home to mom about. Instead, we're seeing sales flop and chop around near historically low levels. That will likely continue for some time thanks to the large overhang of existing home supply, rising unemployment, and the recent upward trend in mortgage rates.

Mortgage demand hits 7-month low despite drop in rates. Here's why ...

Mortgage applications dropped sharply in the week of June 26. The Mortgage Bankers Association's application index (chart above) plunged 18.9% to 444.8, the lowest level since late November. The refinance index tanked 30%, while the purchase index slipped 4.5%. This occurred despite the fact mortgage rates dropped for the third week (to 5.34% from a recent high of 5.57%).

This fits with what I've been telling various questioners: While 30-year rates in the mid-5s are low on a LONG-TERM historical basis, they're not very low relative to the last five or six years. The average since mid-2003 (when we had the last mega-boom in refis) is 6%, according to Freddie Mac. So the universe of mortgages that can be refinanced on a "rate and term" basis isn't very large in the mid-5s. And of course, the "cash out" refi business is dead in the water. That's because A) falling home values have made it so fewer people have any equity to cash out and B) lenders are much tougher on LTV ratios in the cash out business these days.

We're going to need to see rates head back into the 4s to get the mortgage train rolling again. That's unlikely to happen unless the economy deteriorates sharply, nascent inflation concerns cool, and/or the government regains control of its out-of-control finances (something that would help attract investors to long-term bonds again). That's a tall order, from where I sit.