Thursday, March 15, 2007

Links of the day

According to the Labor Department,the number of Americans collecting unemployment checks in the week ended March 3 increased by 48,000 to reach 2.58 million. Comparing that to the BLS's number for total employed persons of 145,919,000, I get a ratio of 1.7%. It's unfortunate for those who can't find a job, but the bigger picture is that this is manageable number...

IndyMac: 'Don't Label Us a Sub-Prime Lender'...
it's always nice to be able to issue a clarifying press release like theirs..."Based on the definition of subprime established by the Office of Thrift Supervision (OTS) for our regulatory filings, only 3.0 percent of Indymac’s $90 billion in mortgage loan production in 2006 was subprime."...

Novell: The Numbers Just Don't Add Up..."
SuSE Linux sales just aren’t growing fast enough to offset plummeting NetWare sales"...I don't know why ownership doesn't split this company up by spinning off the Linux business, packaging the Netware maintenance business and sell that to some third party, and liquidate the rest. I don't know if they can get back the cost of the tower that they built in Provo, UT...

Thanks to Calculated Risk for this from USAToday: " Workers find it tough to relocate
The offer was too good to turn down. Just after selling his home and moving to a new place, Joe Cashen landed a marketing job with Nissan North America. The catch? He would have to sell his newly purchased home and move his wife and two young daughters from Los Angeles to Nashville.

Two years ago, amid the feverish housing market, such a relocation would have been simple.

But the real estate slowdown means there's no such thing as an easy move anymore: Slumping prices have put a sudden chill on employees' ability to relocate for a job and employers' ability to get new hires to move. Cashen's house languished on the market for more than three months, and he was eventually forced to take a $90,000 loss."
This is a fresh angle on this whole home lending implosion. A lot of blogs and mainstream media are rehashing the same stuff about the plight of the mortgage brokers.

I can definitely see this as a potential problem for a lot of companies. When you take into account the thought that a majority of individuals whose relocations are being paid for are at the higher end of the income bracket, you have to figure that the homes they are looking to unload are going to be in the higher end of the price ranges which generally take longer to sell in any market...

Ten Ugly Truths...Nouriel Roubini lists the reality of the housing implosion as follows:

Ugly Reality #1: The housing recession not only is not bottoming out; it is getting worse and it will be the worst housing recession in the last five decades as my recent analytical paper with Christian Menagatti shows

Ugly Reality #2: The same garbage lending practices used for sub-prime – no/low down-payment, no/low documentation of income and assets, interest rate only, teaser rates, negative amortization, option ARMs - were prevalent among near prime and other (option ARM) prime mortgages. These risky mortgages add up to about 50% of originations in 2005 and 2006, as my research and that in Credit Swiss (among others) shows.

Ugly Reality #3: Not only there is a severe credit crunch in subprime (30 plus lenders out of business); there is also the beginning of a generalized credit crunch for the broader set of near prime and other risky prime mortgages. Default and foreclosure rates sharply up in all mortgages, including near prime such as Alt-A. Lenders and regulators are seriously tightening standards for all mortgages. There is now a sharp swing from very loose to very tight lending behavior by every type of mortgage lender. Ivy Zelman of Credit Swiss recently published an excellent analysis showing that is not just a sub-prime problem. As she put it this credit crunch "will affect the entire housing food chain." There is also a risk of a systemic banking crisis if the economy has a hard landing.

Ugly Reality #4: There is a severe disruption of the CDOs market – given the losses of CDO managers and investors - that risks to lead to a seizure of the entire RMBS market as CDO investments are the foundations of the mezzanine tranches of the RMBS market. See the recent excellent Rosner and Mason paper.

Ugly Reality #5: There is the beginning of a slow contagion to other credit risks: widening of spreads to near junk for major broker dealers; widening of CDS spreads for corporates and non residential real estate as measured by CDX, iTraxx and CMBX indices.

Ugly Reality #6: There is already significant contagion from the worst housing in decades to the other sectors of the economy: auto is in a recession; manufacturing is in a recession; employment growth is slowing down; every component of real investment (residential, non-residential, equipment and software, inventories) fell in Q4 and is falling at a faster rate in Q1. And now the saving-less and debt-burdened consumer is faltering too as two mediocre consecutive months – January and February – of retail sales show. The US consumer is on the ropes and at its tipping point.

Ugly Reality #7: The economy will experience a hard landing, at best in the form of a growth recession (growth in the 0%-1%) for most of 2007 or, more likely, an actual recession starting in Q2. Greenspan thinks a recession by Q4 has a 30% probability; the Fed’s yield curve model prices a 54% probability of a recession in 2007.

Ugly Reality #8: The coming aggressive easing by the Fed will not prevent the US hard landing for the same reasons why the aggressive Fed easing in 2001 did not prevent a recession then: when you have a glut of investment/capital goods – then tech goods, today housing glut, consumer durable and auto glut – the demand for such goods becomes interest rate insensitive. So the Fed will try but will not be able to rescue the economy.

Ugly Reality #9: Decoupling of growth for Europe, Asia and emerging markets will occur only if the US has a soft landing. If the US experiences a hard landing there will be no decoupling whatsoever.

Ugly Reality #10: Previous market corrections were temporary blips and market opportunities because macro fundamentals were sound. The spring 2006 “inflation scare” turned out to be a “scare” without basis; thus markets recovered after a brief turmoil. Today we do not have a “growth scare”; we have US growth fundamentals that are severely weakening and leading to the risk of a hard landing. In that scenario the market will not have a brief correction; instead all sorts of risky assets – equities, commodities, corporate credit risks, emerging market assets – will have a severe downturn once sucker rallies following expectations of a Fed ease will run out of steam when the reality of a hard landing sinks in.

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