Monday, June 16, 2008

FHA is Balking at Taking More Bad Loans

This came out last week but is still relevant. I find it interesting that an agency created during the last really big housing crisis, the Great Depression, is being called on again to step up to the plate. Maybe things are not as rosy as CNBC would like you to think. Text in bold is my emphasis. From

A Bush administration official warned Monday that a proposal to have the government back more bad loans would hurt taxpayers and could make the housing crisis even worse. By the way, the taxpayers being hurt by the housing crisis is a matter of if, it is a matter of when.

Federal Housing Administration Commissioner Brian Montgomery told the National Press Club that Congress legislation proposing that the FHA back up to $300 billion worth of troubled mortgages - or about two million loans - would weaken the agency.

"This is a worrisome idea," Montgomery said. "FHA is designed to help stabilize the economy, operating within manageable, low-risk loans. It's not designed to become the federal lender of last resort, a mega-agency to subsidize bad loans."

Montgomery also argued that the agency has been "hobbled by low loan limits and higher down payment requirements," adding that the FHA "was literally priced out of some housing markets."

He said that the new, higher loan limits announced in March - which range from $271,000 to $729,000 - opened up the market for FHA loans in high priced areas and have already helped about 100,000 homeowners. He argued that higher loan limits should be made permanent to help the housing market.

Montgomery noted that the FHA has already begun pricing the loans it makes according to borrowers' risk levels - a first in the agency's 74-year history - and said that this policy should also be made permanent.

The conventional wisdom had been that charging higher-risk borrowers more would hurt those who need help the most. But Montgomery said such a policy is actually in line with FHA's mission to provide home financing for low income and minority home buyers.

"Contrary to conventional wisdom, FHA families with the lower incomes have higher FICO scores," he said. The target FHA client, then, the lower income American, would pay a lower rate for an FHA loan under risk-based pricing.

"These are hard-working American families who live within their means and pay their bills," said Montgomery.

Montgomery also is re-proposing a rule shot down in court last year that would end seller-financed down payments for any FHA-insured loan.

In these transactions, home sellers - or any entity that would profit from a sale - give 10% or 20% of the sale price to buyers, who can then use that cash as a down payment.

Seller-funded down payment loans now account for a third of all loans in FHA's portfolio, and Montgomery said the practice has contributed to the
foreclosure crisis.

And the FHA reports that these loans are three times more likely to go into foreclosure than loans in which borrowers come up with their own down payments.

"We had to book an additional of $4.6 billion in unanticipated long-term losses, mostly due to the increased number of certain types of seller-funded loans in the FHA portfolio," said Montgomery.

These loans are much more risky, since the buyers don't have a down payment of their own. With little or none of their own money invested, they may be less able or less inclined to keep up with their mortgages payments should they run into trouble. They are also more inclined to walk away from their loans entirely, leaving lenders on the hook.

The industry is finding this to be more and more common. If the buyer has no "skin in the game" they have a propensity to walk when trouble starts. There is a good reason that down payments used to be 20% of the buyers money.

"We are concerned about this business [practice]," he said, "because the substantial losses affect FHA's bottom line and FHA's ability to serve American citizens who need access to prime-rate home loans."

Sunday, June 15, 2008

New Estimates for the Credit Crisis

The news for the credit crisis is not new or significantly different. But, do not expect any real improvements for the next few years. Text in bold is my emphasis. From Yahoo (Reuters):

No one knows when the credit crisis will end. At least someone is being honest about our prospects for the future

But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.

That's the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.

Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc, said in an interview that Wall Street write-downs and losses totaling at least $325 billion so far may ultimately mean $3.9 trillion in tighter credit conditions.

Moreover, home prices may fall as much as 30 percent from their peak in 2006 and not hit bottom until 2010, with greater drops still in subprime mortgage debt markets, he told Reuters.

"The housing correction is in a down phase," Acciavatti said during a high-yield bond conference in New York. "We're now going through a phase of deleveraging and the pulling out of easy money."

Credit markets also will be under pressure from massive write-downs and losses stemming from consumer debt. The International Monetary Fund has estimated write-downs from global investment banks may approach $1 trillion, while J.P. Morgan forecasts the figure may climb as high as $600 billion.

A senior Fitch Ratings analyst forecast more defaults and delinquencies for U.S. home mortgages, and said the highest default rates are coming from recent mortgages originating in the last few years.

"There are a lot more mortgage defaults to come," said Glenn Costello, a Fitch Ratings managing director. "We see an ongoing high level of default."

High-yield corporate bond default rates may climb to 2.25 percent this year and jump to 6.5 percent next year, Acciavatti said in a separate interview. The default rate is now 0.75 percent, up from 0.34 percent at the start of the year, according to JP Morgan data.

Acciavatti, speaking at the New York Society of Security Analysts conference, also said junk bond spreads will push past 800 basis points and may top 900 basis points as the crisis drags out. High-yield bonds now trade at spreads of about 650 basis points over Treasuries, according to Merrill Lynch & Co data.

Tightening credit conditions, high energy prices and weaker growth prospects mean that interest in distressed debt sales and trading may be on the rise, according to Jon Kibbe, founding partner at law firm Richards Kibbe & Orbe LLP.

What a Bank Failure Looks Like

I watched a number of bank failures during the crash of the oil-patch during the mid-1980s. The US has not seen that sort of thing since that time, so I found this article interesting. Do you know where your money is and how safe it is? Text in bold is my emphasis. From the Post and Courier (Charleston, SC):

At 7 p.m. on Friday, Mayor Chris Etzler walked through the back door of First Integrity Bank. The lobby should have been closed for the weekend, but dozens of strangers in dark suits were bustling about with laptops and file boxes. Someone had just delivered 32 pizzas.

Dan Walker, a top official with the Federal Deposit Insurance Corp., a Washington, D.C., bank regulator, had summoned Etzler to explain what was going on: The FDIC had just taken over First Integrity.

“All the deposits are safe,” Walker tried to reassure the mayor. “Nobody is going to have any problems.”

It isn’t easy for 75 federal officials and contractors to slip into a small town undetected and liquidate an 89-year-old bank without anyone knowing. But that’s what just happened in this old railroad town, population 3,200. It’s a scene that’s likely to repeat itself across the country as banks struggle through a painful credit cycle, overwhelmed by troubled mortgages and soured construction loans.

First Integrity, which had two branches and $55 million in assets, was the fourth FDIC-insured bank to fail this year. That’s one more than during the entire three-year stretch leading up to 2008. Some analysts predict that as many as 150 banks, mostly small and medium-size, could fail over the next three years.

In its role as receiver for failed banks, the FDIC acts as a SWAT team, playing equal parts secret agent, medical examiner, salesman and grief counselor. The first 48 hours are typically the most frantic, as the agency must turn a failed bank inside out and oversee its sale — or its orderly burial.

Secrecy is paramount to prevent a panic among the locals and a run on the bank. That could sink a bank and lead to runs on neighboring institutions. Banks only retain a percentage of their deposits in cash, and use the rest for things like loans, which means they don’t have enough money on hand if everyone demands their deposits back at once. Created after the Great Depression to prevent such scares, the FDIC insures deposits at more than 8,000 banks, covering up to $100,000 per depositor in most cases.

To keep a low profile, FDIC officials often use personal credit cards while in town. Many will tell curious strangers they work in insurance. In the case of First Integrity, Mr. Walker rented a conference room in a town 30 minutes away for a meeting of “Robinson & Associates,” and a sign near his hotel’s front door welcomed the fictitious company.

The FDIC allowed a Wall Street Journal reporter to go along with its team in Staples this past weekend, offering a rare window into a little-known government task force.

Despite the military-style planning that goes into taking over a bank, things can go wrong. Once, a local motel guessed the feds were coming and put up a welcome banner on the marquee. Another time, FDIC officials hired a hypnotist to get a confused bank employee to remember the vault code. Sometimes, locals pull up lawn chairs and watch from across the street.

Walker, 61 years old, has been a part of 10 bank closings, but First Integrity was his first time in charge. Before becoming a regulator, he spent four years in the Army and 12 in the Texas National Guard.

In late April, Walker flew to Minneapolis to plot a strategy in case the bank failed. The FDIC knew First Integrity was in trouble because its capital reserves had evaporated, and the delinquent loans on its books more than doubled in 12 months. Many of the bad loans were tied to Florida real estate. The FDIC is still sorting through the bank’s records and wouldn’t elaborate. David Duhn, the former president of First Integrity, didn’t return calls for comment.

On that first trip, Walker visited the bank’s headquarters in Staples. He then drove seven miles east to First Integrity’s other branch in the tiny town of Motley, to get a feel for its layout and size. He strolled in and asked to exchange a couple of dollar bills for commemorative state quarters. The teller obliged. He took a look around. And then he left.

As First Integrity’s health worsened, the bank was unable to find a buyer. Regulators picked a date to swoop in. Ken Jarzombek is an FDIC official in charge of all the groundwork for a takeover team, from acquiring printers to ordering pizzas. He called the Todd County sheriff’s office and notified them that a “government agency” could be coming to town and would pay deputies overtime to assist it. Jarzombek has worked on about 60 bank failures and says law-enforcement officials often try to push him for specifics. “I try to beat around the bush,” he says.
On Wednesday, Walker and other top FDIC officials flew in. They set up a base in a hotel in Baxter, not far from Staples. They recorded the estimated drive time to Staples and scouted for a place to park 50 rental cars.

A onetime railroad and lumber town in central Minnesota, Staples is now a shadow of its vibrant days. The old opera house closed decades ago, and the town is working to refurbish its main landmark, a train depot across the street from the bank. Todd County is one of Minnesota’s poorest areas, and some residents say First Integrity’s failure will be another tough chapter in their history.

On Thursday, a local newspaper, the Staples World, printed an article about the troubled bank and raised the possibility it could be liquidated. Walker was alarmed; this could cause a panic. An FDIC official stationed inside the bank monitored the lobby. Only when it was clear customers weren’t swarming the place did regulators relax.

Friday morning, minutes after First Integrity opened for the last time, Walker sat in his hotel’s conference room and watched the other FDIC officials file in. He waited for someone to close the door before he spoke. “Is anybody in here not supposed to be at a meeting of Robinson & Associates?” he asked. No one said a word.

There was little room for error. A Watford City, N.D., bank, First International Bank & Trust, had tentatively agreed to acquire roughly 75 percent of First Integrity’s assets, worth about $36 million, and all of its deposits, for a premium of $2 million. The FDIC would retain the loans and assets First International didn’t want, and try to collect as much of the loans outstanding as possible. First International planned to open the lobby Saturday morning to assuage the community.

Late in the afternoon on Friday, Walker and a few others began the 30-minute drive to Staples. They walked into the bank and began the formal proceedings. Officials from the Office of the Comptroller of the Currency, a division of the Treasury Department, revoked First Integrity’s charter and appointed the FDIC as receiver.

Walker went into the lobby and introduced himself to the shaken staff. “We understand what you are going through,” he recalls telling them. No one asked questions, and Walker offered one warning: “It’s going to be crowded,” he said.

The rest of the FDIC officials then swarmed in. Armed sheriff’s deputies moved to the doors to stand guard. FDIC officials put tape on some interior doors to prevent them from automatically locking.

By the time the mayor arrived, the agency had already restored access to the automated-teller machine for depositors and changed the bank’s Web site. The vaults were secure.

A crowd of people stood on the sidewalk across the street at a bar called Gary’s Place — a rumor was spreading about a bank robbery. Once they learned deposits were safe, most went back inside.

“We’re going to be out of here as fast as we can,” Mr. Walker told the mayor, Etzler, who had rushed over from his daughter’s high-school graduation. “It will just be a brief blip in history — that’s it.”

Etzler looked relieved. “Just the uncertainty and the questions that have been floating around, to get some finalization to it,” he said.

Some FDIC officials stayed at the bank until 1 a.m. Saturday morning, and many returned seven hours later. By Sunday, almost all of the bank’s files were in boxes and the vaults were being cataloged.

Local residents said the FDIC officials seemed to come out of nowhere. “I didn’t know they were coming, but we knew when they were here,” said Becky Hasselberg, 58, who has lived in Staples her whole life. “People in suits and ties walked into the coffee shop. They weren’t too casual.”
Monday morning the bank reopened. A temporary sign out front read “First International Bank & Trust — Member FDIC.”

This Weekend's Contemplation - What is the Consumer Buying? Is SPAM Making a Comeback?

Consumer behavior is beginning to change as a result of economic uncertainties and higher energy and food prices. But, the real question is how has the consumer changed their consumption patterns. Everyone has probably heard of the move away from trucks and SUVs and into more fuel efficient cars. But what about food and other products? I found the article below interesting. From Market Watch:

Wondering how consumers are coping in such a troubled economy? Look at what's selling instead of which sales are tanking.

As consumers muddle through all that is plaguing the U.S. economy, they have battened down the hatches and sharply shifted their spending habits, turning to money-saving options that run the gamut from transportation to health as they find ways to pay for dramatic increases in gasoline and food.

What emerges is a new paradigm of consumerism that some experts believe will live long after this economic crisis is resolved.

"Suddenly consumers are focused on buying what they have to have as opposed to buying what they want to have," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment-banking firm.

"This is a permanent change for Americans, who will face a declining standard of living over the next 20 years," he added.

Consider this: Truck and SUV sales are losing air as quickly as a popped tire but hybrids and fuel-efficient car sales are holding their own. Sales of scooters, which can cover twice as much ground on a gallon of gasoline as America's favorite Toyota Camry sedan, are gaining as fast as prices at the pump.

Sales at department and specialty stores have been in the dumps for many months. But sales at drug stores and most deep-discount stores are in rally mode as more people opt for stores closer to home and those perceived as value giants.

Meanwhile, home-seamstress haven Jo-Ann Fabrics inc delivered surprisingly strong first-quarter earnings after a stretch of dismal results, thanks in part to strong sales of sewing notions, quilting and craft items. Same is true for Michael's Arts and Crafts, suggesting that consumers are going back to the basics as they spend more time at home.

At the grocery store, the soaring costs for chicken, fresh strawberries and beans are leading consumers to the frozen- and canned-foods aisles where the prices are more palatable for a family of five. Even Spam is making a comeback.

"This is impacting every single American right now," said Dan Houston, president of Principal Financial. "No one's immune."

Yes, even the rich are joining the cut-the-corners club, according to a bevy of reports. Take dining patterns: When BIGresearch asked if they had cut down on going out for meals this year, 36.2% of those with household incomes over $100,000 said they had -- a 13 percentage point jump from a year earlier. A tightening up on restaurant meals from January through March of 2008 accounted for most of the increase.

The Food Marketing Institute recently reported that 83% of consumers are eating home-cooked meals in, of all places, their own homes at least three times per week. FMI also found that wealthier households are more apt these days to buy food to make at home than lower-income households that tend to pick up cheap burgers and fries at fast-food restaurants.

The latest update of the Principal Financial Well-Being Index found that more Americans are pinching pennies when it comes to everyday spending.

Since April, 56% of workers and 55% of retirees told Principal that they have pared spending because of the economy's woes. That's significantly more than workers, at 38%, and retirees, at 32%, who said the same thing only six months ago.

More than two-thirds of both groups said they're forking over about $100 more a week on groceries compared with last year. About half of both groups are eating out less and also stocking up on store or generic brands more often, while more than one-third of them are giving up convenience and premium items for cheaper alternatives. Another one-third is stalking multiple stores in search of sales.

But what are they buying? According to Information Resources Inc., which uses sales receipts of consumer products as a measure of shopping behavior, they're forgoing fresh fruits and vegetables in favor of the frozen varieties because they're cheaper. Don't confuse that with frozen prepared foods. They're shunning those to cook from scratch, but using the frozen vegetables, fruit and meats instead of the fresh products.

In the last year, sales volumes of frozen pizza fell 3% while receipts for frozen dinners and entrees dropped 4%. Yet sales volumes of frozen vegetables were higher by 4% while frozen poultry sales jumped 8%.

Sales of Spam -- the shoulder-pork-in-the-can luncheon meat -- are up some 10% amid a price hike and were a big contributor to parent company Hormel Foods' Hormel Foods Corporation second-quarter profit growth.

"We're still seeing very robust sales," Chief Executive Jeff Ettinger said on the quarterly conference call of Spam and Hormel Compleats, "because I think the consumers in this environment are still seeing those as excellent values versus some of their alternative meal options."
Consumers are also turning to analgesics and cold medicines to treat ailments on their own rather than seek -- and pay for -- a doctor's visit. Sales of thermometers, for example, surged 8.3% in the last year.

"We're in a transformation from a real-live, in-your-face consumer perspective," said Thom Blischok, president of IRI Innovating and Consulting. "People won't stop using toilet paper, but they will stop using other products."

Blischok sees three major consumers trends occurring that vary by income. Those making under $50,000 a year are redefining what goes into their shopping carts, choosing hot dogs instead of steak. "They're finding ways to stretch the meal dollar by going back to just the essentials," he said.

The mid-tier consumer in the $50,000 to $100,000 income range is "selectively deselecting" in what Blischok called a "substitution strategy." They're choosing to buy cheaper wines and to swap out bottled water for tap with a purifier, he said.

Those earning $100,000 and above are doing something similar in what Blischok labeled "de-prioritizing."

"These people are asking themselves, 'Do I really need a $100 bottle of wine? Wouldn't a $40 bottle do,'" he said.

All income groups are also switching to "affordable indulgences," he said. Rather than opting out of something like, say, ice cream, many consumers will get a quart instead of a half gallon, or they'll decide to buy coffee grounds to brew at home rather than buy Starbucks drinks daily.

Among the more disconcerting findings in a recent IRI survey was that one-third of consumers said they will buy fewer healthy products because they're more expensive. Forty-six percent of those were earning $35,000 or less.

Elsewhere, consumers are giving up their gas-guzzling cars for short-distance driving and jumping on scooters. "Scooter sales are through the roof," said Johnny Scheff who owns Motoworks Chicago. Scooters, which are like super-bicycles with motors, can get anywhere from 60 miles to, some owners insist, 95 miles on a gallon of gas, depending on their size.

Scheff is already seeing sales triple what they were a year ago and expects scooter sales to make up 80% of his business this year versus 20% traditional motorcycles. "My business has turned into a scooter shop overnight," he said.

At Vespa, sales in May surged 105%, according to Chief Executive Paolo Timoni, and are on track for a 40% year-over-year increase. He points to rising gas prices and the efficiency of the Vespa compared to an SUV or a truck as well as a capitulation of sorts among American consumers.
"They're finally getting it," he said. "People have been using scooters in Europe for years and there was a stigma about it in the U.S. That's changed now with gas prices so high."

Finally, consumer confidence sunk to a 16-year trough in May, inflation expectations touched an all-time high and spending intentions were scaled back for most categories, according to the latest economic data. But consumers plans to buy new TVs hit a fresh high, further underscoring their desire -- or plain need -- to find entertainment at home.

David Rosenberg, Merrill Lynch's chief economist in North America, thinks nesting has become a trend.

"In order to get from point A to point B without spending $75 filling up the tank, households now seem bent on cocooning by staying home to watch television rather than drive to the local theater and shell out more than $11 to watch a film -- and an extra $5 to get there," he said.

Wednesday, June 11, 2008

Food Crisis?

I personally know very little about a food crisis other than what I read in the news and what the increasing price of energy is doing to food prices and what in turn that is doing to disposable income and the effect this has on economic growth, consumer sentiment, etc. Regardless of what the government statistics show everyone knows what is occurring at the grocery store, especially if you have kids to feed. Furthermore, everyone also knows that prices are not headed down anytime soon. As a result I found Paul Krugman's article on the food crisis interesting. Reminds me of a quote I heard during the oil-patch crash of the mid-80s "don't overlook the destructive power of coincidence". Text in bold is my emphasis. From the NY Times (by the way this article dates from last April):

Grains gone wild

What's behind the world food crisis?

These days you hear a lot about the world financial crisis. But there's another world crisis under way - and it's hurting a lot more people.

I'm talking about the food crisis. Over the past few years the prices of wheat, corn, rice and other basic foodstuffs have doubled or tripled, with much of the increase taking place just in the last few months.

High food prices dismay even relatively well-off Americans, but they're truly devastating in poor countries, where food often accounts for more than half a family's spending.

There have already been food riots around the world. Food-supplying countries, from Ukraine to Argentina, have been limiting exports in an attempt to protect domestic consumers, leading to angry protests from farmers - and making things even worse in countries that need to import food.

How did this happen? The answer is a combination of long-term trends, bad luck - and bad policy.

Let's start with the things that aren't anyone's fault.

First, there's the march of the meat-eating Chinese - that is, the growing number of people in emerging economies who are, for the first time, rich enough to start eating like Westerners. Since it takes about 700 calories' worth of animal feed to produce a 100-calorie piece of beef, this change in diet increases the overall demand for grains.

Second, there's the price of oil. Modern farming is highly energy-intensive: A lot of BTUs go into producing fertilizer, running tractors and, not least, transporting farm products to consumers. With oil persistently above $100 per barrel, energy costs have become a major factor driving up agricultural costs.

High oil prices, by the way, also have a lot to do with the growth of China and other emerging economies. Directly and indirectly, these rising economic powers are competing with the rest of us for scarce resources, including oil and farmland, driving up prices for raw materials of all sorts.

Third, there has been a run of bad weather in key growing areas. In particular, Australia, normally the world's second-largest wheat exporter, has been suffering from an epic drought.

OK, I said that these factors behind the food crisis aren't anyone's fault, but that's not quite true.

The rise of China and other emerging economies is the main force driving oil prices, but the invasion of Iraq - which proponents promised would lead to cheap oil - has also reduced oil supplies below what they would have been otherwise.

And bad weather, especially the Australian drought, is probably related to climate change. So politicians and governments that have stood in the way of action on greenhouse gases bear some responsibility for food shortages.

Where the effects of bad policy are clearest, however, is in the rise of demon ethanol and other biofuels.

The subsidized conversion of crops into fuel was supposed to promote energy independence and help limit global warming. But this promise was, as Time magazine bluntly put it, a "scam."

This is especially true of corn ethanol: even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains. But it turns out that even seemingly "good" biofuel policies, like Brazil's use of ethanol from sugar cane, accelerate the pace of climate change by promoting deforestation.

Meanwhile, land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuels are a major factor in the food crisis. You might put it this way: people are starving in Africa so that American politicians can court votes in farm states.

Oh, and in case you're wondering: All the remaining presidential contenders are terrible on this issue.

One more thing: one reason the food crisis has gotten so severe, so fast, is that major players in the grain market grew complacent.

Governments and private grain dealers used to hold large inventories in normal times, just in case a bad harvest created a sudden shortage. Over the years, however, these precautionary inventories were allowed to shrink, mainly because everyone came to believe that countries suffering crop failures could always import the food they needed.

This left the world food balance highly vulnerable to a crisis affecting many countries at once - in much the same way that the marketing of complex financial securities, which was supposed to diversify away risk, left world financial markets highly vulnerable to a system-wide shock.

What should be done? The most immediate need is more aid to people in distress: the United Nations' World Food Program put out a desperate appeal for more funds.

We also need a pushback against biofuels, which turn out to have been a terrible mistake.

But it's not clear how much can be done. Cheap food, like cheap oil, may be a thing of the past.

Monday, June 9, 2008

The Conference Board Has a New Employment Index and It Sees More of the Same

The Conference Board has developed a new employment index, which it will roll out soon. The trend that the index indicates is continued softness in the employment market through the end of the year. Text in bold is my emphasis. From

Unemployment is likely to continue to rise as companies cut more jobs, according to a new index from a respected business research group released Monday.

The Conference Board's Employment Trends Index (ETI) uses eight widely followed readings on employment and economic activity from both government and industry sources.

The Conference Board said the decline in the index's May reading suggests that the labor market hasn't yet hit bottom. The organization has computed the index readings back 35 years and found that it accurately predicts all turns in the labor market accurately during that period.

It said combining those eight factors gives a far more accurate reading on the employment outlook than looking at any of them alone.

"We forecast further softening in the labor market, a moderate rise in unemployment, and weaker wage growth over the next several quarters," said Gad Levanon, senior economist at The Conference Board. "Employers will find it easier to recruit and hire, and will be looking at slower growth in compensation costs. Workers will find it harder to get a job, a raise or a bonus - all of which will further rein in consumer spending."

The index turned lower in July 2007, signaling the loss of jobs and the rise in unemployment that has shown up in Labor Department readings so far this year.

The index has fallen by 6% from its peak in July, with a 0.5% decline between April and May. The last time the peak was as low as the April reading was December 2004.

The Conference Board plans to release this new index the Monday after the government's latest employment report. On Friday, the Labor Department reported the fifth straight month of
job losses, with employers trimming 49,000 jobs from payrolls in May. The unemployment rate posted its largest jump in 22 years, rising to 5.5% from 5% in April.
Conference Board economists said the 5.5% unemployment rate may be overstating unemployment in the current economy due to the influx of teenagers into the work force who have not been able to find jobs.

They said the unemployment rate could decline later in the summer, even if the economy continues to lose jobs, as teenagers become discouraged and stop looking for a summer job.

But they said the ETI would have to show two to three months of gains, including positive readings for multiple components, before the index would predict a rebound for the labor market.

The index crept up slightly in January, but that was due to a gain in only one component, the National Federation of Independent Business' job opening index, which shows hiring by small businesses.

Levanon said that since the ETI has signaled every pickup in payrolls in the past 35 years -- usually about three months before the actual increase in jobs -- he believes job losses will continue for at least the next quarter or two.

And even after there are gains to the nation's payrolls, the unemployment rate typically continues to rise as discouraged job seekers who had stopped looking for work return to the labor force.

Keith Hembre, chief economist of First American Funds, said that given other indicators he tracks to make employment forecasts, including corporate profit and business confidence, he agrees that employment isn't due for any near-term rebound.

"What the Conference Board index is suggesting is pretty much in line with my thinking," he said.

Hembre expects more payroll losses of about 50,000 to 60,000 jobs a month through the second half of the year. And he thinks the unemployment rate is likely to reach 6% sometime in early 2009.

Sunday, June 8, 2008

The Net Worth of Americans is Down $1.7T in 2008 Q1.

The net woth of American households is down $1.7T in Q1 2008, mostly as a result of declines in financial assets (i.e. the stock and bond markets). This should not come as a big surprise, but the real question is what effect it will have on consumer behavior for the remainder of the year. Text in bold is my empahsis. It can't make the consumer feel more confident. From

Americans saw their net worth decline by $1.7 trillion in the first quarter - the biggest drop since 2002 - as declines in home values and the stock market ravaged their holdings.

Meanwhile, the amount of equity people have in their homes fell to 46.2%, the lowest level on record.

The net worth of U.S. households fell 3% to $56 trillion at the end of March, according to the Federal Reserve's flow of funds report, which was released Thursday.

The value of real estate assets owned by households and non-profits declined by $305 billion, while financial assets fell by $1.3 trillion, led mainly by a $556 billion drop in stocks and a $400 billion decline in mutual funds.

The first quarter's decline follows a $530 billion drop in wealth in the fourth quarter of 2007. Until then, net worth had been rising steadily since 2003, climbing nearly 31% over those five years. During the bear market of 2000 through 2002, household's net worth dropped 6.2%.

The recent declines, however, may not affect consumer spending, said Michael Englund, senior economist with Action Economics. Americans have actually spent more in recent months, particularly at the gas pump as fuel prices soared.

Americans "are spending everything in their wallet and borrowing more," Englund said. "But because the pump takes so much more of their dollars, they are buying fewer T-shirts."

Still, as people feel begin to feel poorer, the growth in consumer spending may slow, said Scott Hoyt, senior director of consumer economics at Moody's

Household debt grew by 3.5% in the first quarter, down from 6.1% in the fourth quarter. The growth of home mortgage debt, including home equity loans, cooled to an annual rate of 3%, less than half the pace of 2007. Consumer credit, which includes credit cards, rose at an annual rate of 5.75%, the same as the 2007 pace.

The fact that consumers continue to borrow against their homes, even as they decline in value, shows how troubled Americans are.

In the first four months of the year, employers cut 260,000 jobs, and on Friday the government is expected to report an additional 60,000 losses in May. Gross domestic product rose at a sluggish annual rate of 0.9% in the first three months of the year, when adjusted for inflation.

Whether household wealth will be up or down at the close of 2008 depends more heavily on the stock market's performance than on housing values, since financial assets account for about two-thirds of net worth. . . . .

Thursday, June 5, 2008

Capital Adequacy for the Banks – Warnings from the Fed and the FDIC

Based on these and other comments the Fed and the FDIC continue to be concerned about the level of capital the banking industry has. Allow me to repeat myself, "Do not underestimate the probelm of adequate bank capital". Text in bold is my emphasis. From Yahoo.

Bankers grew so sloppy about risks during good times that they may now need to cut dividends and raise more capital to prepare for coming problems, Federal Reserve Vice Chairman Donald Kohn warned on Thursday.

In remarks to the Senate Banking Committee, Kohn warned that weak earnings and asset value write-downs loom for bankers who didn't prepare in prosperous years for current problems with housing and other loans.

"The extended period of good times in the banking system bred a sense of overconfidence among many bankers and other market participants, causing them to underestimate risks and not fully consider the potential for those good times to end," Kohn said.

Kohn was on a panel of regulators who appeared before the committee to answer questions about how the banking sector was faring as a widening sea of problems engulfs the U.S. housing sector and raises fears of potential bank failures.

He warned that the quality of existing loans likely will keep deteriorating for some time.

"House prices are still declining sharply in many localities and losses related to residential real estate -- including loans to builders and developers -- are bound to increase further, Kohn said.
"Weak economic conditions could well extend problems to other segments of lending portfolios including consumer installment or credit card loans, as well as corporate loan portfolios," he added.

The chairman of the Federal Deposit Insurance Corp, Sheila Bair, warned that weakening real estate markets could take down bigger banks than in the past because of their hefty lending for costly commercial projects.

"There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past," Bair said. "Uncertainties in today's economic environment continue to pose significant challenges for the banking industry, households, and bank regulators."

Kohn said loan loss reserves that banks have set aside have not kept pace with growth in problem assets and should be bolstered.

"In view of this uncertain outlook, additional capital injections and consideration of dividend cuts are still warranted for some of these companies and we have strongly encouraged supervised bank holding companies to enhance their capital positions," Kohn said.

A gauge of the strain that housing markets are under came from the Mortgage Bankers Association, which said on Thursday that home foreclosures and the rates of homes entering the foreclosure process hit record levels in the first quarter.

Leading the wave of failing loans were so-called subprime borrowers -- people with spotty credit records still able to get mortgages in the boom period before 2006 -- who now cannot keep up their payments.

A record 0.99 percent of U.S. loans were entering the foreclosure process in the first three months of 2008 compared with 0.58 percent in the same period a year earlier, the lenders' lobby group said.

Kohn said banks must pay more attention to the fact that market liquidity "may erode quickly and unexpectedly," so they need to maintain "more robust" liquidity and capital cushions.

How does this sound like cheery news?

"This is a key point supervisors are reinforcing strongly," Kohn said.

The Fed is one of several supervisory agencies that monitor the nation's banking system, in particular the big bank holding companies.

Kohn said the Fed intends to send strong supervisory messages to senior bank managers -- "perhaps with more force and frequency than in the recent past" -- to make sure they do not again lose their focus on the importance of sound risk management.

John Reich, director of the Office of Thrift Supervision, said in testimony that savings institutions were "generally" holding up remarkably well in the current climate.

Reich said the agency, which largely regulates mortgage lenders, found the number of problem thrifts rose this month to 17 from 12 at the end of the first quarter.

Monday, June 2, 2008

Foreclosures in the US by County

The "picture" from the NY Times gives an interesting depiction of foreclosures in the US by county.