...released today:


Data source: US Census Bureau


And an excerpted commentary from DJ Newswire (my emphasis):


"The market is bedeviled by foreclosures. Buyers are gobbling distressed property, priced cheaply, and passing up on new homes [...] The median home price dropped 15.4% to $170,200 from $201,300 in April 2008."

C/F the renewed foreclosure wave referred to in yesterday's post.

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A little chart from SG to chew over whilst waiting for this afternoon's US National Association of Realtors (NAR) existing home sales data:


Nice work - by including the Federal Housing Finance Agency (FHFA) data SG get around the criticisms that the two Case-Shiller indexes (the "CS" runs in the graph) only represent a quarter and a third of the US population respectively; and that the NAR is simple marketing guild.

The broadest-based FHFA data also shows affordability to be well above historic lows. Which looks, well, curious if this is supposed to be real estate's near-trough during a an acute financial crisis. Still, the latest FHFA House Price Index (HPI) data point is out tomorrow [correction, today] and optimists will hope it builds on two months of...price rises! [Correction, the FHFA data fell sharpish].

Against that is the weight of inventory: Fannie and Freddie, and a few other lenders, ended a moratorium on foreclosures in March that had been in place since last November.

Looks like the long haul...

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A brief counterpoint to yesterday's back-to-flint euro housing vision. The OECD composite leading indicators, despite the bad press these get in some quarters, belie the prevailing economic melancholy (a bit).

The latest numbers (paradoxically for leading indicators, from March) look like this:


Exhibit 1: OECD composite leading indicators, 2005 to 2009



French, Spaniards and Brits may guffaw. But, considered together with the OECD's business confidence data below, the overall pictured seems less gloomy:


Exhibit 2: OECD business confidence indicators, 2005 to 2009



Still, it is irrational to be sanguine when the monthly leading indicators for Germany and the United States continue to fall with increasing pace (what inflexion point?). Indeed, the US picture (SPX data through May included) looks like this:


Exhibit 3: OECD composite leading indicators for the USA





Nevertheless, equities called the turn in April and such anticipation was comforted by last week's release of slightly more timely US Conference Board leading indicator data:



Vast fiscal stimuli and free money will have its day.

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...according to Citigroup research in their Euro Weekly note entitled "Housing Bust".

Yes, deflating news for euro property owners. Citi's trio of analysts Michael Saunders, Jürgen Michels and Giada Giani are calling for the bust in several European Union (EU) nations on the basis of a departure by prices from the fundamentals that have driven them over the last 15 years. They foresee price drops of 10%-15% by 2010 and 20% - 30% over the next 4 to 5 years.

Some graphs:

(why aren't EU prices more in line with the US and UK trend?)




(it's not as though EU wealth has defied global macroeconomic forces)




(nor is financing easier than during the peak buying frenzy of 2004)




(in fact affordability levels are near historical nose-bleed levels)




(worse, beyond 2010 poor trends in the“household formation” population are a negative driver)




There is more than a hint of confirmation bias in the report – property bears are de rigeur nowadays. And, despite its tabloid title, the data aligns more with the observed inexorable, slow hiss of price deflation ongoing in much of this scribe’s corner of France as sellers come to realise they won't get even last year's prices now - much less those of 2007.

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...even in a book review piggy-backing on great work?

This piece from The New Republic casts a favourable eye on Alice Schroeder's new biography of Warren Buffett, The Snowball: Warren Buffett and the Business of Life.

An excerpt:

"Which brings us, oddly, to our present financial crisis. There has never really been a bad time in the last fifty years to be Warren Buffett, but just now would seem to be less favorable than most. If Buffett still measures his life by the book value per share of Berkshire Hathaway, then for the first time in forty years he must feel like a wasting asset. His share price is still off more than 40 percent from its highs, underperforming even the S&P 500. He railed against derivatives as weapons of mass destruction, and now turns out to have been sitting on a $68 billion pile of credit default swaps and exotic put options on various stock market indexes. And having vowed never again to become entangled in a big Wall Street investment bank, he has gone and sunk $10 billion into Goldman Sachs, a virtual re-enactment of his investment in Salomon Brothers--cash for reputation. The difference this time is that he has gotten himself a sweeter deal than not merely ordinary shareholders, but also the U.S. Treasury."

How pleasant to peer into the management accounts of the Buffett character, method and machine rather than merely having to be content with the PR equivalent of a GAAP financial accounting snapshot.

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Have a feeling the man who called all this a "pale recession" may be a shade late on the cliff analogy in his latest (presumably unpaid) media utterance.

Great quote in there too from the man who produced the Cash for Clunkers notion, Alan "Playing a" Blinder:

“if there are no more reversals, history will judge that by May 2009 we will have passed the worst of the crisis.”

Let me offer readers this free, evergreen tool in the same spirit:

“if there are no more reversals, history will judge that by [fill in a date of your own choosing] we will have passed the worst of the crisis.”


UPDATE: James Quinn, the Daily Telegraph's "Wall Street Correspondent" this morning described Mr Greenspan's message in this same interview as "prescient". Right. My bad.

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Since that story broke last week about Blackrock (maybe) muscling in on the iShares sale to CVC Capital Partners by swallowing the entire Barclays Global Investors (BGI) operation I have wondered what possesses the bank's board, in actual context, of the necessity to dump such an asset.

FT Alphaville last Friday covered much of the ground in this regard and generously provided one analyst's take (Alex Potter at Collins Stewart):

"Whilst BGI does generate c.15% of Barclays group profits, is a relatively low-risk business and has been a great success since its acquisition from Wells Fargo and Nikko in 1995 for $440m, the benefit of raising book value and capital whilst avoiding government intervention outweighs this loss, in our view."

The bothersome part is not that it leaves the fate of earnings in the hands of the investment bank which, thanks to the Lehman acquisition, had a strong first quarter. That the level of these results is probably not sustainable is a given. There will be volatility.

No, the curious bit is what they left behind on the balance sheet instead. "Sell your losers" is the difficult but necessary task of market business.

Barclays has £18 billion of leveraged loans and commercial real estate sitting on its books. Mostly the latter. And, whilst page 1 of Friday's FT led with the potential $10 billion BGI sale, page 3 was entirely devoted to rising defaults in UK commercial property (link to web version). For its part, Barclays wrote-down £2.6 billion, partly in this sector, during the first quarter: the £18 billion referred to above is the post-losses number.

As the FT article sets out, UK banks do not want another 1990s property slump to deal with. They are therefore not calling in the loans but gouging borrowers on the rollover. Sounds a good idea for margins but this puts them in danger of doing a Japan and "supporting" problem loans in the very sector that requires the unpleasant medicine of a shakeout.

That would allow Barclays (and the others) to keep classing such loans as performing. But it will also contribute to keeping capital values at depressed levels - including those on their own balance sheet. To perhaps end up doing it with the good money made from the sale of a true asset whilst merely only delaying the day when government intervention is required looks the risk.

Barclays diluted shareholders twice in 2008 to the tune of nearly £12bn - all at a cost higher than the terms on offer from the UK's Treasury. Now it hopes to get another £6bn to £7bn from BGI. It all looks mightily like selling winners in order meet margin calls on losers.

Perhaps there will be no more deterioration beyond what is forecast by the bank (1.5% impairment this year on the whole loan book). But in the event that they are wrong (again) one wonders where the next pot of money will come from if not the public purse. Equity holders should wonder too.

All guesswork, of course, although the Japan "zombie" banking experience through five public recapitalisations is a handy guide.


NB: Scribe short BARC

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It must be Friday:



If you have not seen the coverage the Daily Telegraph's scandal central page is here; and a very amusing (and depressing) slide show of some of the things MP's indulged themselves with at taxpayers' expense is here.

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The Daily Telegraph took time out last week from the search for honourable members in the UK’s House of Commons to post this upbeat article on the beneficial impact of the swine flu scare upon Jamaica’s tourist industry.

This is a case where it pays to check the context and the data cited very carefully. Last year aircraft delivered tourists to the country rose 3.7% compared to 2007 – but this was more than offset by a decline a 7.7% in cruise passenger visits. And the start to the year has not been anything to cheer about either: whilst air passenger number in the first quarter rose modestly cruise arrivals fell off a cliff, down nearly 29%. Overall, more than 70,000 fewer tourists than Q1 last year.

The trend is similar across the Caribbean. Last year was poor but not catastrophic. But this year – going on the incomplete data provided by the Caribbean Tourist Organisation (CTO) – appears for most destinations to have started very badly. Most worryingly, there is not a single destination in this report from the CTO to which aircraft passenger arrivals in the first 3 months of the year are not decelerating at an increasing pace compared to 2008.

What might the future hold? The rough and ready chart below tracking Barbados air arrivals against the S&P 500 is at once comforting and foreboding. In historical terms the industry is holding up – but the trend is far from encouraging.


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In an appearance at the National Association of Realtors Alan “Pale Recession” Greenspan responded to a somewhat ironic suggestion (given his audience) that critics who said his easy central bank policies had inflated the housing bubble had a point:

“I respectfully disagree, they're wrong… I think there is a recalibration of financial history that I find very puzzling” (link)

The artist formerly known as Maestro also:

  • predicted that the economy could handle a further 5% decline in house prices
  • found it puzzling that sliced bread rather than chow mein was given so much credit
  • was confident that Chairman of the House Financial Services Committee Barney Frank would win the Miss America crown in 2010 at a canter.

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Click through to the fine interactive version on the FT site.

You probably do not need to have to slog through the detail of the test methodology to have a view on how well the "150 economists and professionals" were able to get to grips with the balance sheet judgement calls that banks everywhere shoehorn into GAAP and IFRS.

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A photo like that was made for caption contests.

In fact, this snap was made on a recent city-break to Lyon, sans enfants, in the town's Parc de la Tête d'Or and marks the 1996 G7 get together that took place there. The dedication reads “Together for Peace and Justice”.

That was rightful acknowledgement of what at that stage appeared to be a resolution of the most serious of the Balkan fighting (pre Kosovo), the bombing and killing of 19 at a US military compound in Saudi Arabia 2 days before the conference begun as well as being the usual platitudinous reference encompassing debt relief, trade justice (excluding Cuba of course) and so forth.

But in cold economic terms it was a conference sandwiched by the Mexican Peso Crisis and the collapse of Barings Bank on one side and the approaching Asian Crisis on the other.

The then IMF Managing Director, Michael Camdessus, whatever the criticisms (and they bear scrutiny ex-post) that would be levelled at him for the IMF's “solutions” to the Asian Crisis made presciently clear the week of the Lyon conference that the infrastructure permitting financial crisis on a grand scale was solidly in place – even if it was impossible to work out which bus it would arrive on:

"The global economy has suffered several costly financial crises over the last decade. Plunging asset prices, major bouts of exchange market volatility, a crisis in emerging markets sparked by events in Mexico, and the collapse of several major financial institutions, in the industrial and emerging market countries alike, all underline one of the major weaknesses of our system. Thus far, the international community has been able to cope with these episodes, but not without difficulty. Will it be prepared for the next one? " (link)

Unfortunately, he then embarked on a self-congratulatory sketch of what the IMF was doing to prevent a recurrence of the last (Peso) war without considering the versatile capacity of the underlying financial conduits to fight new style wars.

A long way of saying plus ça change. We are at it again, fire fighting, muddling through and looking backwards for solutions. In the daily minutiae of SCAP announcements, TARPs and QE it is easy to forget the fundamental approach must be prevention - and the logical place to concentrate on that is with strong, though desperately unpopular, contra-cyclical policies.

But we don't seem to have the full complement of vegetables for it.

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On the occasion of the upcoming release of the latest Star Trek movie, some internal promotion of this site's newsletter:

"Way back in March 2008 Richard Bove, one of the oft-seen talking heads from the financial television invitee carousel and the then bank sector analyst for Punk Ziegel & Company, wrote this in a note to clients:

"The actions taken by the Federal Reserve were innovative, dramatic, and, in my view, brilliant because they went right to the problem [...] The actions being taken by the Federal Reserve are being mirrored by the Treasury, which now has finally grasped the scope of the problem. […] The last time an opportunity of this nature existed to buy bank stocks this cheap was in 1990. The next time will be in 20 years. This is a once in a generation opportunity."

One might think such a spectacularly incorrect call would sink, without a trace, an analyst's career. However, Mr. Bove appears to have flourished both in terms of his media presence and professionally. But has he? Having issued such impoverishing advice how would it be possible?

Calls like Mr. Bove's are the sorts Kadous and Mercer analyse in their forthcoming paper “Is there safety in numbers” They take the commonsensical starting point of assuming that bold plus accuracy produces more credibility for an analyst than accuracy alone...."

...Continue reading here on page 8. For mailing list, subscription info and rates go here.

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Strictly speaking, it's arguable if they can compete with the Romans. However, in April alone, amongst the hundreds of papers they produced, the academics tackled:

  • How come bankers are happy with fair value accounting when it comes to their compensation packages but not so thrilled with it for their firms' results?
  • What are the latest developments in fundamental indexation research?
  • Should equity analysts be bold with their calls or stay with the crowd?
  • When will US housing recover?
  • Does the way a CEO finances his own home purchase say something about how he will finance his company operations?

There are some gems but a lot of digging is required to find them - even with some of the best web aggregators. So this monthly round-up below may be of help. Further info, mailing list requests, the downloadable .pdf version and pricing go here.

ARM May Edition

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