Wednesday, October 7, 2009

Consumer credit continues free fall


Consumer credit outstanding results are not pretty.  Outstanding consumer credit continues falling with neither the first nor second derivative being positive.  As I have mentioned before the rate of decline is unprecidented.   It was World War II the last time consumer credit fell at such a rate and WWII is a pretty good excuse not to go out and borrow more money.  As you can see from the picture (click on it for a larger image) consumer credit before has fallen to a negative growth rate, but only for a short period of time and it quickly turned upwards. 

Since the US consumer is  approximately 70% of US GDP this does not bode well for growth in the near term.

Friday, October 2, 2009

Oil inventory levels

Oil inventory levels continue to rise on a year over year and absolute basis.  Considering the seasonality of energy usage I added a graph showing the year over year % change.




Numerous factors are keeping oil prices up (weak dollar, tension in the Gulf, predictions of a recovering world economy, oncoming winter, etc.) but the higher inventory levels rise the harder it becomes for oil prices to remain elevated.

Source:  http://tonto.eia.doe.gov/dnav/pet/hist/wtestus1w.htm

Thursday, October 1, 2009

Mortgage delinquencies continue to rise


I was going to work up a nice graph and some commentary regarding mortgage delinquencies, but Calculated Risk beat me to it.  A picture is worth a 1000 words and the graph tells an ugly story.

Unfortunately the data it describes is millions of people losing their homes and it is getting worse.  It can be hard to remain analytical when you think about that.  Maybe that is another reason to call economics the dismal science?

Wednesday, September 30, 2009

Refining margins are really low


From Platts (2009 September 29) , quoting Verleger:

"Verleger points to a weakening 3:2:1 crack spread on the NYMEX, which settled at $2.28/b on September 25, the 69th smallest of 1,239 observations dating back to January 1986. "[I]t is in the fifth percentile...This is bad, very bad," he said.

Verleger cites not only poor product demand but mounting global inventories of distillate and gasoline."

If the refiners cannot make any money refining, who will buy all the oil?

You can play with the data shown above at Bloomberg

Tuesday, September 29, 2009

Subprime Housing Mess 2.5

Why is this version 2.5? Because we should have learned.  This one is brought to you with the usual actors only this time they are sitting in slightly different chairs.

The Buyer is the same as before, but instead of exceedlingly loose credit standards, the consumer is helped along by an $8,000 first time home buyer tax credit.

The Provider of the loans is not Wall Street this time, but good old Uncle Sam.  From WSJ Opinion (2009 September 29)

The reason for this financial deterioration is that FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, FHA's insurance portfolio will have expanded to $1 trillion from $410 billion. Today nearly one in four new mortgages carries an FHA guarantee, up from one in 50 in 2006. Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guarantee repayment on more than 80% of all U.S. mortgages. Sources familiar with a new draft HUD report on FHA's worsening balance sheet tell us that the default rates have risen most rapidly on the most recent loans, i.e., those initiated or refinanced in 2008 and 2009.

All of this means the FHA is making a trillion-dollar housing gamble with taxpayer money as the table stakes. If housing values recover (fingers crossed), default rates will fall and the agency could even make money on its aggressive underwriting. But if housing prices continue their slide in states like Arizona, California, Florida and Nevada—where many FHA borrowers already have negative equity in their homes—taxpayers could face losses of $100 billion or more


So who is buying the mortgages? The very banks in trouble, with a little 'encouragement' from the FDIC. (WSJ, September 10,2009)

Holding Ginnie bonds help banks look better because federal bank-capital  guidelines give the Ginnie securities a "risk weighting" of 0%. That means banks don't have to hold any cash in reserve to protect against losses. By contrast, securities backed by Fannie Mae and Freddie Mac, the two mortgage giants seized by the government, carry a 20% risk weighting, meaning some cash needs to be set aside to hold them, even though most banks and investors think there is scant risk of Fannie or Freddie securities defaulting. Privately issued mortgage-backed securities can receive risk weightings of 50%, while many other types of debt carry 100%.
Because of the different risk weightings, bankers say they are selling relatively safe assets like Fannie securities and replacing them with Ginnie securities. The move doesn't shrink banks' balance sheets or remove their troubled assets. But it reduces their total assets on a risk-weighted basis. That is important because risk-weighted assets are the denominator in some key ratios of bank capital.
"With the pressure for capital, that's really made the Ginnie Maes more attractive," said John C. Clark, chief executive of First State Bank in Union City, Tenn. The bank's holdings of Ginnie securities jumped to $66 million at June 30 from less than $4 million a year earlier.
Like some peers, First State bankrolled those purchases partly with taxpayer dollars that were intended to stabilize the banking industry and jump-start lending. The 32-branch bank used a "significant portion" of the $20 million it received through TARP to buy Ginnie securities, Mr. Clark said. Mr. Clark credits the strategy with helping First State preserve its capital ratios even as loan defaults swelled to $9.5 million on June 30 from $1.6 million a year earlier. During the same period, its total risk-based capital ratio climbed to 11.3% from 10.7%. That gave First State some breathing room above the 10% ratio regulators require for banks to be deemed "well capitalized."
So my friend, whom I'll call Mr. Green and is a banker:  I have my eyes on some nice short term GNMA mbs paper.  (Fortunately your last name makes Mr. Green easier, otherwise I'd use a different color)  Let us load you up on the GNMA's and forget commercial lending.  Good rates, no 'risk' and you can be out to the links even earlier!  As a nice bonus your risk based capital ratios will improve as well.  I can even provide some additonal low cost margin leverage on my end as well.  The banking regulators and your boss will love you!  </end sarcasm>

Unfortunately this party will end like the last one, but we all will be paying the bill again and it will be much larger.  Too late, the bills are already coming due:  Calculated Risk (September 18,2009) -- FHA Cash Reserves will drop below requirement

Ironically, the Federal Reserves focus on purchasing mortgage backed securities from GNMA, Fannie Mae, and Freddie Mac compresses the spread between mortgages and treasury rates.   An artifcially compressed spread crowds out any private market competition, forcing more loans into the gentle loving arms of Uncle Sam.

If I sound a bit annoyed in this post, you are correct.  Collectively we are not learning from our very recent mistakes.

Monday, September 28, 2009

Long Term Interest Rates at juncture

Long term interest rates in the form of the etf TLT (20+ year U.S. Treasury bonds) is at an interesting jucture.











As you can see from these charts by Freestockcharts.com it is approaching a long term overhead resistance as shown by the white line. Each time TLT has reached this area it has eventually gone lower. Will it do so again?

Friday, September 25, 2009

Finding and managing your credit score

In the 'before time' if you had a pulse you could get credit. Those easy times are long gone and bankers seem to have dusted off their old credit analysis textbooks and are taking risk analysis a little more seriously. One's credit score (FICO) has always seemed to be shrouded in mystery and until recently it was somewhat difficult to find out your credit score.

For a good primer on your credit score I suggest you read this article by the Wall Street Journal (September 9, 2009)

Recently several paid services have popped up which will provide your credit score as well as report on any discrepancies in your credit. Why pay for it when you can get it all for free?

A few years ago congress mandated all three credit reporting agencies provide you one free credit report a year. You can get this free annual credit report at annualcreditreport.com All three credit reporting agencies make you go through several hoops in order to get the free report, and don't be suckered into paying for your credit score or a credit analysis. (Transunion requires you set up an account with them. It's free but annoying.) Eventually you'll get a copy of your credit report. I run mine every couple of years just to make sure everything is correct and have discovered discrepancies once or twice that I was able to resolve without too much pain or suffering.

Finding your credit score is a bit easier. Go to creditkarma.com and sign up. Creditkarma intends to make money pitching you various credit card and loan offers based upon your credit information. Creditkarma provides a very readable estimate of your credit score and breaks down how your credit behaviour affects your score. The credit score provided by Creditkarma is from just one of the 3 credit reporting agencies so it is not perfect, but it will be close.
In a later blog entry I'll go through each credit factor and how you can over time improve your score.