Interest Rate Roundup

Saturday, January 31, 2009

Three more bank failures; Next bailout plan to be announced next week?

Bank Failure Friday was a doozy yesterday, with three institutions failing -- one based in Utah, one in Maryland, and one in Florida for a combined asset count of about $876 million. Interestingly enough, in the Utah case, NO buyer could be found for any of the assets or the entire institution, the first time that's happened since 2004.

But don't despair! Washington is riding to the rescue (again). The latest bank bailout plan, likely to include a combination of measures, is on track to be released next week according to the Washington Post. More details below ...

"The Obama administration has finished drafting the central elements of its plan to rescue the financial markets and is gathering feedback from regulators and Wall Street executives, sources familiar with the matter said yesterday.

"While some details need to be hammered out, the strategy is likely to be laid out publicly in about a week, the sources said.

"In finalizing the plan, officials have made a policy decision that could dismay lawmakers. The administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid but instead retain looser requirements initially included in the Treasury's $700 billion rescue program, a source familiar with the deliberations said. Officials are concerned that harsh limits could discourage some firms from asking for aid.

"The administration envisions a range of initiatives to jump-start the consumer credit markets, provide aid to struggling homeowners, and motivate banks to increase lending. The plan will also offer banks more capital and buffer them against losses on portfolios of "toxic" assets, backed by failing mortgages and other troubled loans.

"Earlier this week, Treasury Secretary Timothy F. Geithner met with Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila C. Bair and Comptroller of the Currency John C. Dugan to discuss the plan, a source said. They met again yesterday. Administration officials have also begun to talk to Wall Street executives to receive input on how the government might relieve banks of troubled assets, the source added.

"Several sources said Bair has been aggressively pushing for months for the government to use federal rescue funds to set up a government bank that would buy up the distressed assets. Such an institution would lessen the burden on her agency, which insures deposits at failing banks up to $250,000."

Friday, January 30, 2009

Q4 GDP comes in at -3.8%

The government just released its report on Q4 2008 Gross Domestic Product and the numbers came in better than expected, at -3.8% vs. forecasts for a reading of -5.5%. But that's still the worst decline going all the way back to 1982. The main price gauge contained in the report fell at a 0.1% annual pace, the biggest decline since 1954. A separate indicator that tracks the prices that consumers pay (excluding food and fuel) rose at a 0.6% pace. That's the smallest gain since 1962.

Personal consumption declined at a 3.5% rate, a slight improvement from -3.8% in the third quarter. But that is also the first time we've seen declines of 3% or more in back-to-back quarters since modern records were first collected in 1947.

Some other tidbits: Gross private investment collapsed at a 12.3% rate, compared with a 0.4% rise in Q3. Investment in residential structures plunged again (-23.6%), while investment in nonresidential structures shifted into negative territory for the first time (-1.8%) and investment in equipment and software imploded 27.8% -- a decline the likes of which we haven't seen in a half century. Government spending was in positive territory (+1.9%), but the strength was at the federal level. State and local spending dropped 0.5%.

Thursday, January 29, 2009

Hate to say I told you so, but ...

The Treasury bond market continues to collapse under its own weight. The long bond futures are down ANOTHER 28/32 as I write, extending recent losses to around 15 points in price. In fact, this month is shaping up to be the worst month for the Treasury market going all the way back to April 2004, according to Bloomberg.

Not only did the Fed fail to live up to expectations that it would immediately (or very shortly) start buying Treasuries, but demand for the latest flood of 5-year notes also came in weak. The Treasury sold $30 billion of 5s today at a yield of 1.82%, above pre-auction talk of 1.8%. The bid-to-cover ratio also came in weak at 1.98 (the lowest since September and before that, May). Indirect bidding was the only bright spot, with 34.9% of the notes sold going to that group (which includes foreign buyers).

I warned that Treasures were vulnerable and that the market was taking on bubble-like characteristics weeks ago. I hope you dodged this bullet.

New home sales collapse 14.7%

Holy moley! New home sales fell off the table in December. More details:

* Total sales collapsed 14.7% to a seasonally adjusted annual rate of just 331,000 from a revised 388,000 in November (previously reported as 407,000). That was way, way below the forecast for a reading of 397,000 and the lowest level of new home sales in recorded U.S. history (the data goes back to 1963). Sales readings for October and September were also revised lower, by 13,000 and 8,000 respectively.

* The raw supply of homes for sale continues to decline -- to 357,000 in December vs. 397,000 in November. I have been highlighting this trend, which results from the dramatic cutback in home construction, for a long time. However, because the pace of sales collapsed, the "months supply at current sales pace" indicator of inventory rose to 12.9 from 12.5. That's the highest on record as well.

* The median price of a new home dropped 6% to $206,500 from $219,700 in November. Prices were down 9.3% from the year-earlier reading of $227,700. New homes are now the cheapest they've been since December 2003 ($196,000).

So much for optimism about the housing market. While existing home sales held their own in December, new home sales fell off the table. In fact, we have NEVER sold this few homes in any month since the Census Bureau started tracking in 1963. Not even in the early 1980s, when mortgage rates were in the 18% range. Sobering news indeed. If there's a sliver of good news, it's that the raw supply of homes for sale continues to fall. Still, the plunge in the sales rate drove the "months supply at current sales pace" indicator of inventory to the highest level ever.

These figures just underscore the fact that it's not all about mortgage rates. Surging unemployment is a much more important factor when it comes to the decision to buy a home. If you're worried you're going to lose your job, you don't care if 30-year mortgages are going for 3% or 8%. You're not going to buy a house. And unfortunately, the news on the jobs front is awful - just this morning, for instance, we learned that continuing jobless claims hit a record high in mid January.

Jobless claims hit record high, durable goods orders tank

The latest economic news continues to disappoint, which shouldn't come as any surprise. Durable goods orders for December dropped 2.6%, worse than expectations for a decline of 2%. Excluding transportation orders, durables were down 3.6% against a -2.7% forecast.

On the employment front, initial jobless claims rose to 588,000 from a revised 585,000 (forecast was for 575k). Continuing claims hit 4.776 million, up from 4.617 million a week earlier and against a 4.62 million forecast. Continuing claims are now at their highest level since the Labor Department first tracked the numbers in 1967.

Wednesday, January 28, 2009

Fed: Rate target unchanged at 0% to 0.25%, ready to buy anything and everything; Bonds annihilated

The Federal Reserve just released its latest statement. The message in a nutshell: Rates will stay low for a long time and we'll buy anything and everything to keep credit costs low:

"The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

"Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

"In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs."

UPDATE: Bonds are getting annihilated on the Fed's lack of a specific plan to buy Treasuries. Long Bond futures are now down 2 7/32, while the cash 30-year bond is off 3 16/32. Ten-year note yields have shot up by 11 basis points to 2.64%. The dollar is catching a bid in response, while the Dow is still up almost 200 points.

The latest "solution" to the banking crisis

The banking stocks recently suffered another mini-crash. So it's no surprise Washington is responding with yet another "solution" to the crisis. Every few months, this happens. Some bank, broker, or subsector of the credit market blows up ... policymakers try to think up a solution ... that solution gets leaked to the press ahead of time ... financial stocks rally ... and then the whole sorry process repeats itself. It reminds me a lot of the Bill Murray movie Groundhog Day, where weatherman Phil Connors is forced to relive the same dreary day over and over again.

The latest news is that Washington will soon establish a "bad bank." It will reportedly buy toxic assets from banks, more than likely at inflated prices. Government officials will justify doing so by claiming today’s asset and security prices are “artificially” depressed by forced selling and that its “mark to model,” hold-to-maturity prices are more accurate. This process will make bank balance sheets look better and supposedly resume the flow of credit to the economy.

Other possible plans are also on the table, according to the Washington Post ...

"President Obama's top advisers are in the final stages of debating several perilous options to right the financial system, all of which are likely to prove unpopular and in some cases carry a significant risk of failure, according to sources in contact with the officials.

"The rapid deterioration of the economy has accentuated these hard choices. The health of many banks is getting worse, not better, as the downturn makes it difficult for all kinds of consumers and businesses to pay back money they borrowed from these financial firms. Conservative estimates put bank losses yet to be declared at $1 trillion.

"Senior administration officials are likely to try a combination of initiatives rather than pin their hopes on a single, all-encompassing solution to help the financial system, the sources said. But their strategy may require trial and error, which could make them vulnerable to the same criticism that dogged the Bush administration's fitful management of the $700 billion rescue program.

"On the table are several approaches, which officials have begun to experiment with on a smaller scale. One would give the firms a federal guarantee protecting them against losses on assets that are backed by failing mortgages and other troubled loans. Another would set up new government institutions to buy these toxic assets. A third would inject more money into financial firms in exchange for ownership stakes, perhaps ending with nationalization in all but name."

I hate to sound so cynical. But haven't we seen and heard this movie before? Haven't we been promised several "solutions" to this crisis over the past 18 months? And hasn't every single one ultimately proven to just medicate the patient, rather than cure the underlying disease? There's a very simple reason for that, one the politicians simply won't admit: There is no quote-unquote solution. Nothing ... NOTHING ... can prevent a painful adjustment process from unfolding.

I wish that weren’t the case. But the time to prevent this painful correction and deleveraging process was a few years ago when the bubble was inflating. If regulators, policymakers, borrowers, and lenders hadn’t acted so stupidly then, we wouldn’t be in this mess. But they did, we are, and no amount of talk out of Washington can change that fact.

Oh and by the way, the estimated cost of the credit crisis continues to rise. Just this morning, the International Monetary Fund (IMF) raised its estimate of the losses from the financial crisis to $2.2 trillion. Its October estimate was only $1.4 trillion. Just about the only certain thing associated with the latest bailout plan is that it will lead to billions and billions (and billions) more dollars worth of debt being piled on the back of U.S. citizens.

Tuesday, January 27, 2009

Two year Treasuries move pretty well

The 20-year TIPS auction was a dog. But the auction of $40 billion of 2-year notes went over much better. The notes sold at a yield of 0.925%, a bit below pre-auction talk of 0.939%. The bid-to-cover ratio was a lofty 2.69, the most at any sale since October 2007. Indirect bidders took down 34.6% of the sale -- not great, but not bad either. Bond prices popped to their day's high in the wake of the auction results.

Another month, another drop in home prices; November's decline comes to 18.2%

The latest figures from S&P/Case-Shiller have just been released. The research group says home prices dropped 2.23% between October and November in 20 top U.S. metropolitan areas. That was a slight increase from the 2.18% drop a month earlier.

On a year-over-year basis, prices fell 18.2% in November, compared with an 18.1% decline in October. The largest YOY drops could be found in Phoenix (-32.9%), Las Vegas (-31.7%), San Francisco (-30.8%), and Miami (-28.7%). Every single market showed a decline, with the most moderate drops found in Dallas (-3.3%) and Denver (-4.3%).

Monday, January 26, 2009

Stinko 20-year TIPS auction

The Treasury just sold $8 billion of 20-year TIPS at what looks like a stinko auction. The notes were sold at a yield of 2.5% versus pre-auction talk for a yield of 2.37% (per Bloomberg). The bid-to-cover ratio came in at 1.92, compared with an average of 1.98 for the past five sales. Indirect bidders bought 54% of the notes issued, below the five-auction average of 57.2%.

Long bond futures fell on the news, recently down 31/32 to a price of 128 20/32. Ten-year yields are up about 5 basis points. Next up: $40 billion in 2-year notes tomorrow and $30 billion in 5-years on the 29th.

Existing home sales rose 6.5% in December

The latest existing home sales figures for December were just released. Here's a recap:

* Existing home sales popped 6.5% to a seasonally adjusted annual rate of 4.74 million from 4.45 million in November (originally reported as 4.49 million). That was better than the forecast for a reading of 4.4 million.

* The raw number of homes for sale dropped 11.6% to 3.676 million units. That's normal to see at year end, but the figure is also down 7.5% from the year-ago level. The months supply at current sales pace indicator of inventory dropped to 9.3 from the 11.2 cycle high set in November and April of 2008.

* The median price of an existing home dropped 2.7% to $175,400 from $180,300 in November. That was also down 15.3% from $207,000 in the year ago period. That's the biggest decline so far, and it leaves existing home prices at the lowest level since May 2003 ($175,200).

Americans love a bargain, and the housing market is no exception. Nationwide home prices dropped by the most on record in December, slumping to the lowest level in almost six years. That caused some bargain hunters to step off the sidelines.

The increase helped to reduce the mountain of property for sale as well, exactly what we need to see if the housing market is ever going to get back to a state of equilibrium. The key question going forward: Can the momentum be sustained in the face of rising unemployment and tighter lending standards? Only time will tell. But it's hard to imagine a lasting turn in the housing market with thousands of layoffs being announced every few days.

Layoffs, more CRE problems, and more

It's another ugly Monday morning on the news front, especially as it relates to jobs. Heavy equipment maker Caterpillar says it will slash 20,000 jobs due to slumping demand for construction gear (It had 113,000 workers at the end of 2008). Wireless company Sprint Nextel is also chopping 8,000 of its workers. Other companies reportedly weighing layoffs -- or already cutting jobs -- include Home Depot (7,000), Starbucks, Pfizer (19,000), and Eaton (5,200).

Meanwhile, the problems continue to spread in key sectors of the commercial real estate market. The latest beset by woe? Hotels. As the Wall Street Journal noted in a story today ...

"The downturn in the U.S. hotel industry is becoming so acute that it has thrust the sector into crisis, leaving vacancies at a 20-year high and putting many properties in danger of missing payments to lenders.

"In the wake of cutbacks by business and leisure travelers alike, U.S. hotels this month are expected to post their 15th consecutive month of declining occupancy, longer even than their 12-month losing streak after the Sept. 11, 2001, terrorist attacks.

"That occupancy drain, coupled with declining room rates as hotels compete for customers, is expected to result in the hotel industry's steepest decline in revenue per available room since 2001, according to market-research company PKF Consulting Inc. The report, scheduled for release today at the American Lodging Investment Summit in San Diego, says that revenue per available room will fall by 9.8% this year.

"If conditions are as weak as expected, PKF estimates that nearly 20% of a sample of 1,500 U.S. hotels that it studied won't generate enough cash flow this year to cover interest payments on their mortgages, up from nearly 16% last year. This year's projection is on par with the most recent high of 20.7% in 2003 but still short of the 1991 recession's 25% tally, according to PKF.

"U.S. hotels now carry roughly $250 billion in cumulative mortgage debt, according to Foresight Analytics LLC. Many hotel owners who can't generate enough cash to cover their debt service in this recession will avoid default and foreclosure by digging into their own or partners' resources to make up the shortfall or by negotiating a compromise with their lenders."

Friday, January 23, 2009

Treasuries mauled as my "no free lunch" theme gains traction

I have been hammering home a clear point for several weeks -- there is no such thing as a "free lunch." You can't simply bail out anyone and everyone, especially when you're a debtor nation, and expect your creditors to just grin and bear it forever. Click here or here or here for more of my views on this topic.

Now investors seem to be waking up. Treasuries have been getting mauled this week, losing value every single trading day this week (Long bond futures are going for around 128 21/32 vs. 136 7/32 last Friday). Yields on 10-year Treasury Notes have shot up to 2.68% from their December 30 low of 2.06%.

As a refresher, we’re flooding the world with hundreds of billions of dollars in Treasuries to fund our ever-growing deficit. Next week alone, the government is selling $40 billion in two-year notes, $30 billion in five-year notes, and $8 billion in 20-year inflation-protected securities. Total borrowing needs may hit $2.5 TRILLION this fiscal year, according to Goldman Sachs, up from the firm's previous forecast for $2 trillion in issuance.

As if that weren't enough, incoming Treasury Secretary Timothy Geithner just fired a shot across China’s bow by saying the Chinese government is “manipulating” its currency, the yuan. The Obama administration believes that China should allow the yuan to strengthen against the buck.

There’s just one problem: China is the world’s biggest holder of our government debt, with $682 billion as of November. Geithner’s comments could lead to a new round of financial and diplomatic tension between China and the U.S. It may even lead China to retaliate by dumping bonds.

One other market signal that's worth mentioning: Silver and gold prices are rising even though the dollar is climbing. For the longest time, the metals traded inversely to the dollar. When the dollar rose, the metals fell, and vice versa. But that is now starting to change.

I have a thesis that might explain what's going on: Global investors are starting to sour on government debt all around the world. They can see that the cost of bailing out banks and economies here in the U.S., in Asia, and in Europe is spiraling out of control. They know that means governments are going to be issuing trillions of dollars in new debt, driving down the price of existing securities. Result: They’re flocking to alternative stores of value -- including silver and gold.

The decline in bond prices says that thesis is right on target. So does the rise in metals prices. And so does the surging cost of insuring against SOVEREIGN debt defaults. On example: Credit default swaps on U.S. 5-year debt just hit 74.9 basis points, or $74,900 for every $10 million in Treasury debt. That’s the most expensive it has ever been to buy insurance against a U.S. default, and a big rise from only 6 basis points in early 2008. CDS costs on European and U.K. debt are climbing, too.

Are those levels still extremely low? Yes. But the trend is clear. It offers yet another warning sign that the market's appetite for funding unlimited bailouts with multi-trillion dollar price tags is waning. Policymakers better sit up and take notice before these minor market tremors grow into something far more damaging.

Friday, January 16, 2009

A few pre-vacation thoughts ...

I'll be heading out on the high seas with the family for vacation soon. So you can expect limited posting over the next few days. But I had a few quick thoughts to share before then ...

First, the rumored Bank of America bailout is confirmed. The company is getting a $138 billion government lifeline in the form of a $20 billion capital injection (in the form of 8% preferred shares issued to the government) and a $118 billion guarantee of assets. More specifically, BofA will take the first $10 billion in losses on the asset pool, with all losses beyond that being split between BofA (covering 10%) and the Treasury and FDIC (90%).

According to the term sheet (PDF link), the assets include "financial instruments consisting of securities backed by residential and commercial real estate loans and corporate debt, derivative transactions that reference such securities, loans, and associated hedges."

As a refresher, the combined Merrill Lynch/BofA entity already soaked taxpayers for $25 billion. Meanwhile, in the fourth quarter, BofA lost $1.79 billion, or 48 cents a share. That compared to a profit of $268 million, or 5 cents per share, in the year-ago quarter. Those results didn't include the separate Merrill numbers, which were downright awful: $15.3 billion in red ink.

Second, even more bailouts will now likely be forthcoming given that the Senate voted to approve the second batch of TARP funds. It's likely that any institution receiving taxpayer money will have to accept tougher terms, however. More from the Wall Street Journal:

"The Obama team hasn't detailed where it will direct the next $350 billion beyond foreclosure efforts. It is expected to continue purchasing equity in financial institutions and might also buy troubled assets clogging the financial system.

"Mr. Obama is trying to turn public sentiment toward the financial bailout, which has become politically toxic in the hands of the Bush administration. Lawmakers and much of the public say they are upset at how the money has been spent and accounted for, and the lack of conditions placed on those receiving aid.

"Lawrence Summers, Mr. Obama's pick to head the National Economic Council, said in a letter to Congress that healthy banks with good capital will be required to increase their lending and that Treasury will track such activity. Firms that receive money would also be precluded from using government funds to buy healthy firms instead of lending the money.

"In a nod to concerns about how the bailout has expanded beyond financial firms to include the U.S. car business, Mr. Summers said the second half of the funds would be used to help prevent "systemic consequences in the financial and housing markets," not to implement an "industrial policy" that would aid various troubled industries. To assuage Republican concerns, the Obama team also agreed to provide additional support to the auto industry only "in the context of a comprehensive restructuring."

Third, the U.S. slipped closer to outright deflation in 2008, with the cost of goods and services rising just 0.1%. That was the smallest gain since 1954. The Fed believes that deflation is the root of all evil and has declared it will do everything in its power to avoid it. We'll see if it can succeed in 2009.

Thursday, January 15, 2009

RealtyTrac: 2.33 million foreclosures in 2008

RealtyTrac just released its year-end foreclosure figures for 2008. Total filings climbed 81% to a record 2.33 million (though in fairness, the firm has only been tracking the numbers for four years). The company estimates that 1 in 54 U.S. housing units, or 1.84%, were involved in some sort of foreclosure filing (notice of default, auction notice, etc.) last year. Nevada had the worst foreclosure rate, with 7.3% of the state's housing units in some stage of default. It was followed by Florida (4.5%) and Arizona (also 4.5%).

Wednesday, January 14, 2009

BofA back for another turn at the public trough

Bank of America has already received $25 billion in bailout funds from the U.S. government (in reality, taxpayers like you and me). Now, it's coming back to the public trough for another multi-billion dollar feeding, according to the Wall Street Journal. More below ...

"The U.S. government is close to committing billions in additional aid to Bank of America Corp. as the nation's largest bank by assets tries to digest its Jan. 1 acquisition of Merrill Lynch & Co., according to people familiar with the situation.

"The discussion began in mid-December when Bank of America, already the recipient of $25 billion in federal rescue funds, told the U.S. Treasury Department it was unlikely to complete its purchase of the ailing Wall Street securities firm because of Merrill's larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.

"Treasury, concerned the deal's failure could affect the stability of U.S. financial markets, agreed to work with the Charlotte, N.C. lender on the "formulation of a plan" that includes new government capital. The terms are still being finalized, this person said, and details are expected to be announced with Bank of America's fourth-quarter earnings, due out Jan. 20.

"Any possible arrangement might protect Bank of America from losses on Merrill's bad assets. There would be a cap on the amount of losses the bank would have to absorb with the federal government being on the hook for the remainder, according to one person familiar with the matter.

"The possible deal is further evidence of the banking system's delicate condition and its hunger for more capital, despite billions of dollars already invested in financial institutions by the federal government. Thus far, Bank of America has received $25 billion in federal rescue aid, including $10 billion Merrill Lynch would have received if the sale to Bank of America had not closed."

Beige Book: The economy stinks

That headline pretty much sums up the latest "Beige Book" report from the Federal Reserve. If you prefer the full Fed-speak version, click here. I'll just excerpt the summary below ...

"District reports indicate that retail sales were generally weak, particularly during the holiday season. A majority of Districts noted deep discounting during the holiday sales season. Vehicle sales were also weak or down overall in the Districts reporting on them. Manufacturing activity decreased in most Districts. Declines were noted in a wide range of manufacturing industries, with a few exceptions. Services sector activity generally declined across the Districts, with exceptions in some sectors of the Boston, Richmond, and Chicago Districts. Additionally, several Districts noted weaker conditions in transportation services and slow or decreased demand in tourism activity. Conditions in residential real estate markets continued to worsen in most Districts. Reduced home sales, lower prices, or decreases in construction activity were noted in many Districts. Commercial real estate markets deteriorated in most Districts, with weakening construction noted in several Districts. Overall lending activity declined in several Districts, with tight or tightening lending conditions reported in most Districts. Credit quality remained a concern in several Districts. Agricultural conditions were mixed in response to varying weather conditions across the Districts. Mining and energy production activity generally declined since the previous report.

"Most Districts reported a general weakening of labor market conditions. Lower energy prices were noted in many of the Districts, and, except for the Richmond District, which mentioned higher prices for raw materials, most reporting Districts noted declining input prices. Wage pressures remained largely contained, and some Districts reported pay freezes or reductions in compensation."

Home prices to fall through 2010 ... at least ... in many markets

That is my personal belief, and also the conclusion of the latest Winter 2009 Economic and Real Estate Trends Report (PDF link) from PMI Mortgage Insurance. The company's Market Risk Index, which measures the likelihood that prices will fall over the next two years, climbed in 369 out of 381 metropolitan statistical areas in the third quarter. Not surprisingly, PMI cited rising foreclosures and rising unemployment as the two key drivers of slumping prices. Markets in California and Florida had the highest risk readings, while markets in Texas and a few other isolated locations had the lowest.

Tuesday, January 13, 2009

More losses on commercial R.E. loans looming

The evidence of a second real estate crisis -- this time, focused on the commercial sector -- continues to pile up. According to the following Bloomberg story this morning, the next batch of banking sector earnings reports could be rather ugly ...

"Synovus Financial Corp., Comerica Inc. and Huntington Bancshares Inc. are among regional banks that may face a second wave of real-estate loan losses, this time for shopping centers and residential construction projects.

"Losses in commercial real estate excluding construction are expected to increase tenfold, Deutsche Bank AG analyst Mike Mayo said in a Jan. 5 research note. Moody’s Investors Service said yesterday it’s considering a downgrade of Synovus because of commercial real estate losses.

"Borrowers have fallen behind on payments to regional lenders as the year-old recession shutters retail stores and offices.

"Overdue commercial real estate loans quadrupled from two years earlier in the third quarter to 4.73 percent, according to seasonally adjusted data from the Federal Reserve. That’s the highest level since 1994.

"We’re overbuilt in a lot of areas like shopping malls,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. Apartment developments are also suffering as falling home prices draw people away, he said. “The fundamentals are on the verge of going really, really negative for commercial,” McCain said."

TARP request on the table

It's official: President Bush requested the next batch of TARP bailout money from Congress last night. The incoming Obama administration wants to have the money at the ready in case it's needed to offset emerging economic threats. Now we have to see if Congress will be willing to release the money; lawmakers are still steamed about how the first batch of billions was disbursed. More from the Washington Post below:

"President-elect Barack Obama yesterday launched an aggressive campaign to persuade a deeply skeptical Congress to permit him to spend another $350 billion to stabilize the still-fragile U.S. financial system, as the Bush White House formally notified lawmakers of Obama's intention to use the money.

"Obama began calling lawmakers, promising to respond to their intense criticism of the financial rescue program by expanding its scope to aid struggling homeowners, small businesses and others. His top economic adviser, Lawrence H. Summers, sent a three-page letter to congressional leaders, vowing to better track how the money is spent and bolster oversight.

"The president-elect plans to appear today at a luncheon in the Capitol where he will ask Senate Democrats to stand with him on an issue that is shaping up as an early test of his ability to build bipartisan consensus. Yesterday, he was forced to relent to skepticism on a separate politically complicated initiative, the economic stimulus package, by dropping his proposal to give businesses a $3,000 tax credit for every job they save or create.

"The Treasury Department has already committed the first $350 billion of the financial rescue program. Lawmakers from both parties have complained that the Bush administration rushed the bailout through Congress and then badly mismanaged the program. Some lawmakers were upset that no help came for struggling homeowners. Others said banks and other financial institutions that have received money have failed to resume lending.

"Congress has 15 days to approve a resolution blocking the funds. With anger over the financial bailout at a boiling point in the House, Obama and Democratic leaders are focusing on the Senate, which could vote as soon as Thursday on a measure to prevent release of the money."

Ben Bernanke on the economy, lending, and more

Federal Reserve Chairman Ben Bernanke just released some comments on the economy, the lending industry, and the credit markets.

The first portion of his comments is a recap of his view on the credit bubble ...

"The proximate cause of the crisis was the turn of the housing cycle in the United States and the associated rise in delinquencies on subprime mortgages, which imposed substantial losses on many financial institutions and shook investor confidence in credit markets. However, although the subprime debacle triggered the crisis, the developments in the U.S. mortgage market were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit. Aspects of this broader credit boom included widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking."

He then briefly talks about the fallout from the bust, including the following passage:

"Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on business and consumer confidence and precipitated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial."

He later cites the Fed's aggressive interest rate cuts, and explains why they haven't been as successful as in the past:

"The Fed's monetary easing has been reflected in significant declines in a number of lending rates, especially shorter-term rates, thus offsetting to some degree the effects of the financial turmoil on financial conditions. However, that offset has been incomplete, as widening credit spreads, more restrictive lending standards, and credit market dysfunction have worked against the monetary easing and led to tighter financial conditions overall. In particular, many traditional funding sources for financial institutions and markets have dried up, and banks and other lenders have found their ability to securitize mortgages, auto loans, credit card receivables, student loans, and other forms of credit greatly curtailed."

Then, there is a long discussion about the various types of unconventional policy measures the Fed has taken -- including efforts to feed liquidity to the financial sector, enter into swap arrangements with foreign central banks, buy commercial paper and backstop money market funds. The Fed also discusses how it will be manipulating the asset backed securities market -- and hints that the Fed may expand that program to any and all markets as it sees fit:

"In contrast, our forthcoming asset-backed securities program, a joint effort with the Treasury, is not purely for liquidity provision. This facility will provide three-year term loans to investors against AAA-rated securities backed by recently originated consumer and small-business loans. Unlike our other lending programs, this facility combines Federal Reserve liquidity with capital provided by the Treasury, which allows it to accept some credit risk. By providing a combination of capital and liquidity, this facility will effectively substitute public for private balance sheet capacity, in a period of sharp deleveraging and risk aversion in which such capacity appears very short. If the program works as planned, it should lead to lower rates and greater availability of consumer and small business credit. Over time, by increasing market liquidity and stimulating market activity, this facility should also help to revive private lending. Importantly, if the facility for asset-backed securities proves successful, its basic framework can be expanded to accommodate higher volumes or additional classes of securities as circumstances warrant."

Bernanke then compares and contrasts what the Fed is doing with what the Bank of Japan did during the 1990s -- addressing the question of whether or not the Fed is pursuing a policy of quantitative easing:

"The Federal Reserve's approach to supporting credit markets is conceptually distinct from quantitative easing (QE), the policy approach used by the Bank of Japan from 2001 to 2006. Our approach--which could be described as "credit easing"--resembles quantitative easing in one respect: It involves an expansion of the central bank's balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank's balance sheet is incidental. Indeed, although the Bank of Japan's policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves. In contrast, the Federal Reserve's credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses. This difference does not reflect any doctrinal disagreement with the Japanese approach, but rather the differences in financial and economic conditions between the two episodes. In particular, credit spreads are much wider and credit markets more dysfunctional in the United States today than was the case during the Japanese experiment with quantitative easing. To stimulate aggregate demand in the current environment, the Federal Reserve must focus its policies on reducing those spreads and improving the functioning of private credit markets more generally."

Bernanke then tries to address the questions over exit strategy -- how the heck the Fed pulls back once the markets and economy recover. An excerpt:

"However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to unwind its various lending programs. To some extent, this unwinding will happen automatically, as improvements in credit markets should reduce the need to use Fed facilities. Indeed, where possible we have tried to set lending rates and margins at levels that are likely to be increasingly unattractive to borrowers as financial conditions normalize. In addition, some programs--those authorized under the Federal Reserve's so-called 13(3) authority, which requires a finding that conditions in financial markets are "unusual and exigent"--will by law have to be eliminated once credit market conditions substantially normalize. However, as the unwinding of the Fed's various programs effectively constitutes a tightening of policy, the principal factor determining the timing and pace of that process will be the Committee's assessment of the condition of credit markets and the prospects for the economy."

Later, Bernanke discusses ways the TARP money could be used to fulfill its originally stated purpose -- removing bad assets from bank balance sheets:

"A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions' balance sheets. The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending. Should the Treasury decide to supplement injections of capital by removing troubled assets from institutions' balance sheets, as was initially proposed for the U.S. financial rescue plan, several approaches might be considered. Public purchases of troubled assets are one possibility. Another is to provide asset guarantees, under which the government would agree to absorb, presumably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks. Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank. These methods are similar from an economic perspective, though they would have somewhat different operational and accounting implications. In addition, efforts to reduce preventable foreclosures, among other benefits, could strengthen the housing market and reduce mortgage losses, thereby increasing financial stability."

Bernanke then explains to people that if you don't like the way the government is aggressively supporting the financial industry, but not other types of businesses, you can go pound sand (in more polite terms):

"The public in many countries is understandably concerned by the commitment of substantial government resources to aid the financial industry when other industries receive little or no assistance. This disparate treatment, unappealing as it is, appears unavoidable. Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt. Indeed, the destructive effects of financial instability on jobs and growth are already evident worldwide. Responsible policymakers must therefore do what they can to communicate to their constituencies why financial stabilization is essential for economic recovery and is therefore in the broader public interest."

And finally, before his conclusion, Bernanke states that something needs to be done about the "too big to fail" conundrum:

"Particularly pressing is the need to address the problem of financial institutions that are deemed "too big to fail." It is unacceptable that large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period. The existence of too-big-to-fail firms also violates the presumption of a level playing field among financial institutions. In the future, financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking."

Friday, January 09, 2009

December job losses at 524,000; Unemployment at 7.2%; Hours worked at lowest ever

The December employment report was just released. The number of jobs lost was roughly in line with expectations -- 524,000 vs. a Bloomberg forecast of 525,000. I think the markets were probably braced for a higher "whisper" number, so you could argue that was a relief, especially since it was a decline from the upwardly revised 584,000 figure for November.

However, the unemployment rate was higher than forecast -- 7.2% vs. a forecast of 7%. That is the highest reading since January 1993. The long-term chart above shows this indicator going back to the 1940s, and you can see we still aren't doing as badly as we were in the early 1980s. That said, a broader unemployment measure (one that includes people who want full-time work, but can only find part-time, and those who want to work but aren't actively looking currently) rose to 13.5% from 12.5% in November. That's the highest reading for the series, which dates to 1994.

Average hourly earnings were up 0.3% on the month (0.1% better than forecast), while average weekly hours worked were a worse-than-forecast 33.3. That is the lowest in recorded U.S. history (data goes back to 1964 here). The diffusion index, which measures how many companies are cutting jobs against how many are adding them, also weakened again -- to 25.4 from 27.2 in November. That is a record low for the series, which dates back to 1991.

Thursday, January 08, 2009

Mortgage principal cramdowns to get the green light?

Interesting news out late today: Lenders (led by Citigroup) are caving in to the idea of allowing bankruptcy judges to "cram down" principal balances on mortgage loans. This sensible idea has been fought tooth and nail by the banking and mortgage lobbies. They have argued that mortgage lenders would have to charge higher rates on future loans to price in the risk that a loan they make will be crammed down in the future.

More from the Wall Street Journal ...

"Citigroup Inc. signed onto a deal with top Democrats in the Senate to move forward with a measure that would allow judges to set new repayment terms for millions of mortgage holders who wind up in bankruptcy court, senators involved said.

"The accord on the Senate version of a bill allowing "cramdowns," when bankruptcy judges force lenders to modify mortgages, was negotiated by Sen. Dick Durbin, the Senate's second-ranking Democrat and the author of the Senate bill. Sen. Durbin, who has backed pro-consumer bankruptcy initiatives for years, has worked for more than a year on the cramdown bill.

"The deal, Senate staffers said, is likely the first of several measures being crafted this year that propose to trim the principal owed by homeowners saddled with mortgages larger than the current value of their house. It marks a surprising change of direction by the financial-services industry. Banks have consistently fought such legislation, saying cramdowns, would raise borrowing costs for all home buyers and jam courts with homeowners who would not otherwise declare bankruptcy.

"This is the breakthrough we've been waiting for, to have a major financial institution support this legislation will create an incentive for others to come our way," Sen. Durbin said in an interview. "I want to congratulate Citi for being open-minded about this [and] playing a major leadership role."

New York Times: China interest in U.S. debt drying up?

I talked about the possibility of foreign creditors getting more reluctant to fund U.S. profligacy. Today, it's front page news on the New York Times' web site. More below:

"China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.

"The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.

"On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits “for years to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s.

"In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.

"But now Beijing is seeking to pay for its own $600 billion stimulus — just as tax revenue is falling sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and medium-size enterprises, many of which are struggling with lower exports, and to local governments to build new roads and other projects.

“All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland."

If you didn't already know, Germany had a hard time auctioning off 10-year bonds this week. Will this be the start of a trend? We'll see ...

UPDATE: In all fairness, today's 10-year note auction went well here in the U.S. The $16 billion in notes were sold at a yield of 2.42%, below forecasts for 2.47%. The bid-to-cover ratio came in at 2.59, up from 2.44 at the mid-December auction and the highest since August.

Wednesday, January 07, 2009

The official CBO line: $1.186 trillion

The Congressional Budget Office released its latest official report on the outlook for the nation's finances over the next decade. The projected deficit for 2009: $1.186 trillion. 'Tis but a flesh wound, eh? Er ... no. It's actually the largest deficit ever recorded in world history. In case you're wondering, $1.186,000,000,000 is also:

* More than the inflation-adjusted cost of the Vietnam ($698 billion) and Korean Wars ($454 billion).

* More than the Louisiana Purchase ($217 billion) and the Savings and Loan bailouts ($256 billion).

* Greater than the 2007 Gross Domestic Product of all but 13 other countries in the world.

* Equal to $3,881 for every man, woman, and child in the U.S.

* And it could buy 189,760,000,000 bushels of wheat at recent prices ... 26,893,424,036 barrels of oil ... or 1,581,333,333,333 cans of Diet Coke at my trusty vending machine here in the break room.

Here's the really fun part: The CBO estimate doesn’t even include any potential stimulus package from Congress and the Obama administration. We haven’t gotten the final details of the plan, but it could cost anywhere from $675 billion to $1 trillion. That means the ultimate 2009 deficit could end up being larger by 60% ... 70% ... 80% ... or more.

Maybe you're thinking the red ink is a short-term problem, one that will go away soon? Er ... no again. At least, not according to the CBO. A nifty table on page 23 of the document projects red ink as far as the eye can see: An ADDITIONAL $3,135 trillion from 2010 through 2019.

Congress and the incoming administration could really clamp down on spending going forward (Sorry, I just spit my soda on the keyboard writing that line) to stem the flood of red ink. Or the stimulus plan could manage to completely offset all the credit, real estate, and economic problems, thereby leading to a windfall in tax receipts as the economy comes roaring back and happy days become the norm again (also unlikely). But if not, this country’s finances are going to be blown to hell for years and years to come.

Job cuts surge ... an investor dives into the distressed mortgage pool .. and more on the deficit

Not much positive to report on the employment front this morning. The latest update from ADP showed a massive 693,000-job drop in U.S. payrolls in the month of December. That was up from a revised 476,000 in November and far worse than the 495,000 job losses economists were forecasting. A lot of people are going to be looking to start digging as part of President-Elect Barack Obama's plan to fund "shovel ready" infrastructure projects.

Meanwhile, the FDIC and Private National Mortgage Acceptance Co. (Pennymac for short) have signed a deal whereby Pennymac is buying $558 million in residential mortgages from the banking agency. The loans come from First National Bank of Nevada, which the FDIC took over after it failed in July. Pennymac is buying the loans on the cheap, and hoping to increase their longer-term value by working out and modifying as many as possible.

Also, that trillion-dollar deficit issue I talked about yesterday is big news in the morning papers. The New York Times tackles it in this piece, which adds the following context on just how big a deficit we're talking about, historically speaking (my emphasis added):

"Mr. Obama was not specific about the size of the deficit he expects, beyond his reference to “a trillion-dollar deficit or close to a trillion-dollar deficit” for the fiscal year that ends Sept. 30. Aides said later that the estimate — in line with what economists have been anticipating given the economy’s rapid deterioration — did not include the costs of the proposed stimulus package, which could add hundreds of billions of dollars more to the red ink.

"At $1 trillion, the deficit would not only shatter the largest previous shortfall in dollar terms — $455 billion last year — but it could also exceed the post-World War II-era record by the measure more meaningful in economic terms, the deficit as a percentage of total economic activity.

"Diane Rogers, chief economist at the Concord Coalition, a nonpartisan organization that supports fiscal discipline, estimated that the deficit this year would hit 7 percent of the gross domestic product. The largest previous record in those terms was in 1983, when it hit 6 percent."

One thing I'll add: Keynesian stimulus, massive deficit spending, and so on is all the rage these days. And most economists seem to think it will work. I would just point out that after Japan suffered twin busts in stocks and real estate, it spent money out the wazoo trying to bring the good old days back.

Specifically, it launched a stimulus package of 10.7 trillion yen in August 1992 ... another for 13.2 trillion in April 1993 ... 6.2 trillion in September 1993 … 15.3 trillion in February 1994 ... 14.2 trillion in September 1995 ... 16.7 trillion in April 1998 ... 23.9 trillion in November 1998 ... and 18 trillion in November 1999. Grand total: 118.2 trillion yen (That's about $1.27 trillion U.S. at current exchange rates). The result: Japan STILL suffered a “Lost Decade” of deflation, lackluster growth and declining stock prices.

Or as the Wall Street Journal recently explained: “Keynesian ‘pump-priming’ in a recession has often been tried, and as an economic stimulus, it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.”

Nothing wrong with hoping for the best. But my confidence in a strong recovery is low. The only way to prevent painful busts is to avoid stupid bubbles from inflating in the first place -- a lesson officials at the Fed are hopefully starting to learn.

Tuesday, January 06, 2009

Trillion dollar deficits as far as the eye can see?

That seems to be what we're being prepared to expect, based on the latest commentary out of Washington. An excerpt from the Washington Post:

"After meeting with his economic team earlier today, President-elect Barack Obama predicted this afternoon that the United States would have trillion-dollar budget deficits "for years to come."

"Obama said that Peter Orszag, Obama's choice to head the Office of Management and Budget, forecasted that the United States would have a budget deficit of $1 trillion "even before we start the next budget."

"We have already, that we are already looking, at a trillion dollar budget deficit or close to a trillion dollar budget deficit," Obama said. "And that potentially we've got trillion dollar deficits for years to come even with the economic recovery that we are working on at this point."

"Nonetheless, Obama said, "We are going to have to spend money to jump-start the economy."
The president-elect has proposed a jobs-heavy economic stimulus plan that could range in cost from $850 billion to $1 trillion."

I just hope our children -- and our children's children -- will forgive us for this massive burden that Washington politicians are putting on their shoulders. More importantly for the here and now, we better all hope our foreign creditors will continue to gleefully finance our profligacy. The past few days haven't been so kind to long-term Treasuries, as I noted recently.

Pending home sales drop 4% in November

The National Association of Realtors just released its report on November pending home sales. Here's what the figures showed:

* Pending home sales fell 4% in November. That was worse than the 1% decline that economists were expecting. September's reading was also revised much lower: To -4.2% from the previously reported -0.7%.

* The pending home sales index, at 82.3, was down 5.3% from its year-earlier reading of 86.9. This is a fresh record low for the indicator, which was introduced in 2001.

* Geographically, pendings dropped around the country -- by 2.2% in the South, 2.4% in the West, 6.7% in the Midwest, and 7.2% in the Northeast.

The housing market stayed on its back in November, with pending sales of existing homes falling to the lowest level on record and weakness popping up in every region of the country. Recession, rising unemployment, slumping consumer confidence, and tighter lending standards are all weighing on sales.

Falling mortgage rates in December and early January may help mitigate some of the near term downside. Additional housing stimulus out of Washington could help as well. But a longer-term recovery for housing still remains in the realm of hope rather than reality.

Monday, January 05, 2009

Bonds beaten with the ugly stick

Is there a bubble in Treasuries? I think so, as I have written in a few places. Whether that's the case or not, though, it's clear that bonds are currently getting beaten with the ugly stick. The long bond futures have fallen as much as three points in price today, following a 2 18/32 beating on Friday and a 3 12/32 pounding on New Year’s Eve. The cash long bond has dropped roughly 11 points in price in just three trading days.

What's driving the sell off? Is it the return of risk taking by investors (i.e. money moving out of Treasuries and into risk assets, such as other bonds and stocks)? Is it the end of artificial year-end buying, which may have temporarily bolstered Treasury demand? Or is it ongoing fears about the size of the budget deficit and the economic stimulus package, which will need to be funded by the sale of hundreds of billions of dollars worth of Treasuries (including $54 billion of three-year and 10-year notes this week alone)? Probably a combination of all three.

As a complete aside, I recommend everyone have a look at this Op-Ed piece from the New York Times entitled "The End of the Financial World As We Know It." Nice work there, with some sensible recommendations about how to prevent future financial catastrophes like the one we're coping with today.

Construction spending down, but not out ... yet

The latest figures show construction spending was down, but not out, in the month of November. Total spending declined 0.6% against market expectations for a decline of 1.4%. October's decline was also revised to just -0.4% from a previously reported drop of -1.2%.

The residential market continues to be a lead anchor, with private residential spending down 4.2% -- the biggest decline since July's -6.2% reading. Private nonresidential spending, on the other hand, increased 0.7% after a 0.4% decline in October. Within the private nonresidential sector, spending on lodging was up 0.7%, spending on office property rose 0.9%, spending on transportation projects jumped 3.2% and spending on power facilities climbed 5.3%.

The problem? This nonresidential strength simply isn't going to last. After all, as the New York Times noted yesterday, vacancy rates are rising, rents are falling, and commercial real estate financing conditions are much tighter now than they've been in years. A brief excerpt:

"Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.

"With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market "since the wrenching 1991-1992 industry depression."

Friday, January 02, 2009

Back from vacation

Just in case you were wondering, I didn't get hit by a bus. I just took a few days of vacation (vacation -- what's that?) for the holidays. Of course, it's not like I missed much. The holiday season is usually marked by quiet trading, a dearth of big news, and this year has been no different. Stocks, bonds, and currencies are all fairly rangebound. And the economic data has been bad, but relatively close to expectations (December ISM at -32.4 vs. a forecast of -35.4 ... S&P/Case-Shiller Home price index down 18% in October vs. a forecast of 17.9% ... and so on).

Treasuries did take a pasting in the shortened New Year's Eve trading session, with the long bond futures off by more than three points. The bonds are trading heavy again today, giving up most of their early gains. Whether this turns out to be just profit taking or something more remains to be seen. But it is worth noting given that it's been pretty much a one-way run higher for Treasuries since early November.

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