How Quickly US home prices stabilize?
Needless to say a very important factor as the genesis of the current crisis is attributed to the bubble this sector. It has seen a record decline of 18% in October08 on a year on year basis. As observed:
“The 20-city S&P Case-Shiller index has posted losses for a staggering 27 months in a row. In October, 14 of the 20 cities set fresh price decline records.
…Housing problems are at the core of our economic problems," … "yet, of the government interventions made during 2008, few were focused on housing."
Foreclosures have been worrisome
"October was really the first month to feel the full brunt of the credit crunch," ... "Up until the Lehman Brothers [bankruptcy filing on September 15], everyone felt relatively optimistic.
Plus, in many of the free-falling cities the majority of real estate sales consist of distressed properties such as foreclosed homes and short sales. These houses tend to sell at a steep discount to the rest of the market, and when they account for a large proportion of all sales, they can exaggerate the depth of price declines.”
Mortgage modifications have not helped
“…a recent report issued by the U.S. Comptroller of the Currency (OCC) found that 53% of borrowers who had their mortgages modified in the first half of 2008 were already at least two months delinquent again. The report covered 60% of the outstanding primary mortgages.
Modifications that don't involve some kind of principal reduction or somehow lower payments substantially "just don't work very well…We need to see lenders get much more aggressive when it comes to loan modifications.”
The effect of lowering interest rate need to reflect in new home sales
“…And although interest rates are currently extremely low - the 30-year fixed-rate averaged 5.14% … that's doing more to help people refinancing existing mortgages than it is to help new home buyers.
"Buyers still have to have a 20% down payment," … "and, in this environment, it can be hard to meet that criterion."
Experts observe that the tumble in homebuilding is expected to bottom out by midyear, but house prices will fall an additional 9.8% by yearend 2009, after a nearly 20% decline in 2008.
At the current levels the latent demand would surely be there. However no body would want to buy and see their equity go down. Therefore price stabiliszation would be the driver for home buying to start in right earnest. Keep you ears to the ground!
Copyright © 2008 Tradesense
Monday, January 5, 2009
Market Impact: 2009 Watch List – Part 3
How will US Unemployment rate pan out?
“…This to be seen in the context that consumer spending makes up about 70% of the U.S. economy, and as the credit crunch has dried up Americans' borrowing ability, they're relying on income more than ever for buying power, ...”
The Context:
“…While there was some cheer when the Labor Department said initial filings for state jobless benefits fell to 492,000 for the week ended Dec. 27, a decline of 94,000 from the 26-year high of 586,000 claims a week earlier as against economists expected jobless claims of 575,000 (according to a consensus survey by Briefing.com).
…It's the first time claims were below 500,000 since the week ended Nov. 1, when the government reported 481,000 initial claims. So far this year, job losses have totaled 1.9 million.
The prior week, which ended Dec. 20, saw the highest number of jobless claims since Nov. 27, 1982, when initial filings hit 612,000.”
The adjustments to this figure:
“…seasonal adjustments have become increasingly complicated, a problem compounded by abnormalities like extended auto plant shutdowns.
"All seasonal patterns are out of whack," … "We have to look at data over several weeks, and in that case you still see pretty large uptick in the overall trend."
Over the past four weeks, new unemployment claims have risen to an average of 552,250 a week, down 5,750 from the previous week's unrevised average of 558,000. The four-week moving average is designed to smooth out some of the week-by-week fluctuations in the statistics and provide a wider view of the job market.
The number of people continuing to collect unemployment benefits increased to 4,506,000 in the week ended Dec. 20, the most recent data available. That was a jump of 140,000 from the previous week's revised level.”
The key point to note is that:
“…periods of economic contraction usually occur one or two quarters before a labor downturn. That lag means "the ugly job state we've seen will likely be even more severe next year,"…
Last month, 60% of U.S. CEOs said they expected to cut workers in the next six months, according to the Business Roundtable.
Current expectation of official unemployment rate is expected to peak in the range of 8 to 9% by early 2010. One has to closely monitor any signs/indicators of the situation worsening or improving before the official figures reflect it.
Copyright © 2008 Tradesense
“…This to be seen in the context that consumer spending makes up about 70% of the U.S. economy, and as the credit crunch has dried up Americans' borrowing ability, they're relying on income more than ever for buying power, ...”
The Context:
“…While there was some cheer when the Labor Department said initial filings for state jobless benefits fell to 492,000 for the week ended Dec. 27, a decline of 94,000 from the 26-year high of 586,000 claims a week earlier as against economists expected jobless claims of 575,000 (according to a consensus survey by Briefing.com).
…It's the first time claims were below 500,000 since the week ended Nov. 1, when the government reported 481,000 initial claims. So far this year, job losses have totaled 1.9 million.
The prior week, which ended Dec. 20, saw the highest number of jobless claims since Nov. 27, 1982, when initial filings hit 612,000.”
The adjustments to this figure:
“…seasonal adjustments have become increasingly complicated, a problem compounded by abnormalities like extended auto plant shutdowns.
"All seasonal patterns are out of whack," … "We have to look at data over several weeks, and in that case you still see pretty large uptick in the overall trend."
Over the past four weeks, new unemployment claims have risen to an average of 552,250 a week, down 5,750 from the previous week's unrevised average of 558,000. The four-week moving average is designed to smooth out some of the week-by-week fluctuations in the statistics and provide a wider view of the job market.
The number of people continuing to collect unemployment benefits increased to 4,506,000 in the week ended Dec. 20, the most recent data available. That was a jump of 140,000 from the previous week's revised level.”
The key point to note is that:
“…periods of economic contraction usually occur one or two quarters before a labor downturn. That lag means "the ugly job state we've seen will likely be even more severe next year,"…
Last month, 60% of U.S. CEOs said they expected to cut workers in the next six months, according to the Business Roundtable.
Current expectation of official unemployment rate is expected to peak in the range of 8 to 9% by early 2010. One has to closely monitor any signs/indicators of the situation worsening or improving before the official figures reflect it.
Copyright © 2008 Tradesense
Market Impact: 2009 Watch List – Part2
When will credit flow start in right earnest?
Much of the funds infusion into the banks is being held as cash and is as large as $1 trn. While the credit situation has improved over the last two months it is still tight by relative standards. Banks coming out of this self imposed discipline will be the key to make money move/circulate. How much ever money the Fed pumps into the system unless it circulates the desired effect will not be there.
This reluctance to lend is both psychological (the anchoring of a recent experience) and strategic as these institutions, post infusion of funds, have probably just about restored their capital adequacy. Now they also have a fear that the projected recessionary/deflationary scenario will create loan losses and they need sufficient strength at that time to raise further capital to ensure capital adequacy. Also with the raging unemployment and falling real estate prices any further lending may lead to good money going after bad money.
In the current context, any sign of weakness will result in downgrade by other banks/institutions as counterparty risk will be considered higher. This has its own chain effect.
This then becomes a circular problem as inadequate credit availability in turn reinforces the recessionary/deflationary forces. The thrust required to move out of this orbit -the 'escape velocity' has to be provided by the stimulus packages and massive government spending. Assuming that these packages work and bring back employment and consumer spending, it will put businesses back into business and in turn improve the asset/loan quality of banks. This comfort will then give banks the confidence to lend in right earnest.
Also covering default risk in the CDS market itself has become risky and the only insurance that anyone would trust today is that of the government or if it government backed.
There are other implications too. As a NYT article observes
“A big worry is the future of securitization, a key mechanism of modern banking that enables banks to bundle loans and bonds into securities for sale to investors. This crucial market is moribund now that many of its creations have plunged in value. Some question when, or if, certain areas of securitization will revive.
Securitization, which works like a shadow banking system, has radically changed banking and the credit markets in recent years. Three decades ago, banks supplied $3 out of every $4 of credit worldwide. Today, because of securitization, that share has dropped to about $1 in $3.
Unless financial companies can securitize debt — which, in turn, depends on investors’ willingness to buy the bundled loans — credit will remain tight even if banks resume lending.”
Thus as and when the credit market unlocks the level of overall level of credit will not be the same as was experienced in 2006–07. The leveraging capability of all institutions will be drastically reduced either voluntarily and/or by market forces and/or by legislation. The aggressiveness to lend will be lacking. Modest growth objectives will be set. Many of the large banks have government in them and will find interference in the name of checks and balances.
How long will such packages take to show tangible results and provide the ‘escape velocity’ to the banks, given the political process (as touched upon in my previous post) is anybody’s guess?
Copyright © 2008 Tradesense
Much of the funds infusion into the banks is being held as cash and is as large as $1 trn. While the credit situation has improved over the last two months it is still tight by relative standards. Banks coming out of this self imposed discipline will be the key to make money move/circulate. How much ever money the Fed pumps into the system unless it circulates the desired effect will not be there.
This reluctance to lend is both psychological (the anchoring of a recent experience) and strategic as these institutions, post infusion of funds, have probably just about restored their capital adequacy. Now they also have a fear that the projected recessionary/deflationary scenario will create loan losses and they need sufficient strength at that time to raise further capital to ensure capital adequacy. Also with the raging unemployment and falling real estate prices any further lending may lead to good money going after bad money.
In the current context, any sign of weakness will result in downgrade by other banks/institutions as counterparty risk will be considered higher. This has its own chain effect.
This then becomes a circular problem as inadequate credit availability in turn reinforces the recessionary/deflationary forces. The thrust required to move out of this orbit -the 'escape velocity' has to be provided by the stimulus packages and massive government spending. Assuming that these packages work and bring back employment and consumer spending, it will put businesses back into business and in turn improve the asset/loan quality of banks. This comfort will then give banks the confidence to lend in right earnest.
Also covering default risk in the CDS market itself has become risky and the only insurance that anyone would trust today is that of the government or if it government backed.
There are other implications too. As a NYT article observes
“A big worry is the future of securitization, a key mechanism of modern banking that enables banks to bundle loans and bonds into securities for sale to investors. This crucial market is moribund now that many of its creations have plunged in value. Some question when, or if, certain areas of securitization will revive.
Securitization, which works like a shadow banking system, has radically changed banking and the credit markets in recent years. Three decades ago, banks supplied $3 out of every $4 of credit worldwide. Today, because of securitization, that share has dropped to about $1 in $3.
Unless financial companies can securitize debt — which, in turn, depends on investors’ willingness to buy the bundled loans — credit will remain tight even if banks resume lending.”
Thus as and when the credit market unlocks the level of overall level of credit will not be the same as was experienced in 2006–07. The leveraging capability of all institutions will be drastically reduced either voluntarily and/or by market forces and/or by legislation. The aggressiveness to lend will be lacking. Modest growth objectives will be set. Many of the large banks have government in them and will find interference in the name of checks and balances.
How long will such packages take to show tangible results and provide the ‘escape velocity’ to the banks, given the political process (as touched upon in my previous post) is anybody’s guess?
Copyright © 2008 Tradesense
Sunday, January 4, 2009
Market Impact: 2009 Watch List – Part1
In a background where top economist have given little credence to the idea that the U.S. economy is going to recover in the next six months over the weekend, I thought it may be appropriate to visit the important impacting factors that will shape the markets in 2009. The main focus of course will remain on the US economy. We start with the stimulus package that the market appears to be so bullish about.
How quickly will the US stimulus package be approved?
Source: Society Generale - Cross Asset Research
How quickly will the US stimulus package be approved?
Source: Society Generale - Cross Asset Research The stimulus package expected to be announced during this month is one of the key drivers of optimism today. Seasoned observers however feel that it will take a while before the package is passed and it will have its own speed bumps. Given the amount likely to be involved (estimates are close to a trillion dollars) the process they feel will be theatrical with a lot of face saving.
"…These debates typically play out with the party in charge seeking far more than it wants. Then it drops demands and both sides declare victory with a compromise. We expect this battle to play out that way as well..."
What kind of stimulus package is approved and how it relates to the assessed depth of the recession will be keenly observed. Remember nobody today has a clear idea how long the recession may last (current wise thinking is till mid 2009) or how deep it is likely to be. The nature of package will itself have a causative effect on the perception of the longevity of the recession/deflation.
How effective will it be?
The approval of the package is no panacea. There will be a number of issues to ponder over. The clarity of objective is very important, other wise one can loose the way easily. To quote:
“… to win a war, it's a good idea to map out or at least have a sense of the endgame before deploying the troops. That is, lawmakers must think about establishing yardsticks, curbs and deadlines for the money.
Otherwise, there's a risk that the historic recovery package morphs into a boondoggle that mortgages the nation's future by adding hundreds of billions to the deficit while creating a hard-to-tame bureaucracy.”
Obama is also aware of that this could turn out to be black hole and a clear exit strategy is required otherwise today’s momentary happiness will turn out to be a long term sorrow story. How the growth on spending once started will be controlled is far from clear.
"...We're going to be focusing on the budget, to make sure that even as -- in the short term, we deal with the potentially $1 trillion-plus deficit that we're going to be inheriting and we are trying to jumpstart the economy, that we're also in the medium and long term looking at how we can get on a path of fiscal responsibility and sustainability,…" - Obama.
Another key issue: How will success be measured? Employment will be a lagging indicator and may not allow for quick course corrections.
And the Challenge:
“…Allow politicians to take billions of dollars of your money and dole it out to other politicians, who then give it to other government administrators. All of whom ask you to trust that the funds will be spent wisely…”
Tax Cuts: How effective will it be?
“Generally speaking, economists say, permanent tax breaks boost the economy more. Why? Because consumers feel freer to spend it rather than save it since they know it's a sum they'll get every year.
Vice President-elect Joe Biden said last week the stimulus tax cut would be a "down payment on the tax relief that we promised for the strapped middle class." So the promise of permanence may have its own stimulus effect. But considering that Congress hasn't weighed in on the issue, there's no guarantee.”
What happens to TARP & its cousins?
A Market Watch report says
“…lawmakers are expected to enter a new round of wrangling over the uses of the $700 billion Troubled Asset Relief Program. The Bush Administration's decision to extend the financial system bailout money to automakers pushed total TARP payouts past $350 billion. The Treasury Department must now convince Congress, which is at odds over the best uses of TARP, to release the second half of the $700 billion.
The House Financial Services Committee will hold a hearing Wednesday on uses of the TARP. Separately, Treasury Secretary Henry Paulson is scheduled to speak on the government-sponsored mortgage agencies.”
The prediction is
"...by the time all is said and done, the Troubled Assets Relief Program (TARP) funding will go well beyond $700 billion. President Obama will request, and Congress will approve, another several hundred billion in aid. Much of that will go to homeowners, although airlines will probably get a slug of cash as will auto parts makers.”
Watch out for the black hole syndrome.
Copyright © 2008 Tradesense
Thursday, January 1, 2009
Subscribe to:
Posts (Atom)
Posts
