Absurd "Stress Test" Economics Scenarios

So, the Feds put out their "stress test" economic scenarios this afternoon. CR did a good post on the economic scenarios being used for the stress tests.

They are using an assumption of 8.4% unemployment at the end of 2009. Their worst case scenario is 8.9%.

Unemployment is already 7.6%. It has increased 40bps per month for each of the past two months. It is up 270bps year-over-year, which is 23bps monthly. The Feds would have us believe that unemployment will only worsen between 80 and 130 bps over the next 11 months, for a pace of between 7 and 11 bps per month.

In order for the Feds to be correct, the unemployment rate would have to be hitting an inflection point right now and the rate of increase would have to slow dramatically. This is absurd and in no way is it the worst case scenario.

Here's another interesting fact: California, Washington DC, Michigan, Nevada, Oregon, Rhode Island, South Carolina already had worse unemployment rates, in December, than the worst case stress test scenario.

Bearish News

Layoff Lawyer Sees Ominous Signs. Three million job losses in Q1 2009?

State and local sales tax receipts have been crushed.

GE is highly leveraged.

Bailouts

What is the Bush/O'bama financial apparat going to do with all the insolvent banks in this country?

If they give the banks enough money to save them, whether directly or by buying overpriced loans, it's highway robbery and the fiscal irresponsibility could crush Treasuries and put them in the ground for good.

But letting the banks die or be nationalized is unacceptable to the apparat.

So far they release vague plans so that it's impossible to determine which path they are taking.

China Says "We Hate You Guys"

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.

Mr Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

How are Hotels in Manhattan Doing?

Why do I care about hotels in Manhattan? Stay tuned for coming posts about Morgans Hotel Group (MHGC). Meanwhile, take in this background information:

"Hotel occupancy in the city fell about 5 percentage points in December, to 76.3%, according to Smith Travel Research, a level not seen since 2002. The average room rate dipped 10%, to $297.15."

"Mid-town Manhattan hotels were offering deals for New Year's Eve!"

Business drying up for Manhattan hotels:

“I don’t think anybody realized the switch was going to be turned off so quickly,” said Lisa Grossberg, the general manager of the Buckingham Hotel in Midtown Manhattan. “We saw people being more rate-conscious; we saw the renegotiations of corporate contracts as companies tightened their belts in the fall. But then in the middle of December, everything just about stopped.”

NYTimes reports glut of new hotels has pushed down room rates:

"...the discounts are an opportunity to stay at upscale, amenity-laden properties for what they normally might pay for a more moderate hotel without the latest perks."

"...the Thompson LES, a new boutique hotel on the Lower East Side... The listed rates for the rooms, with Sferra bed linens, slate bathrooms with rain showerheads and Kiehl’s toiletries, begin at $375 a night. Ms. Alexander paid $149..."

"The GEM Hotel and Wyndham Garden Hotel, both of which opened in [Chelsea]... in November, offered introductory rates starting at $189 at that time. Now, their rates start at $159 and $169."

"New York City had the most openings for the 12 months ending in November, with 54 new hotels adding 7,982 rooms to the mix. In the Miami area, 20 hotels, with 4,155 rooms, opened."

Maguire

NY Times article on the chumps - investors - who bought buildings from EOP/Blackstone.

In Los Angeles, Maguire Properties was already laboring under heavy debts when the company paid Blackstone $2.87 billion for 24 buildings, 22 of them in Orange County, the center of the subprime mortgage industry. From the beginning, the loan payments for the Equity Office buildings exceeded the monthly revenue from the properties, according to the company’s regulatory filings.

The company’s vow to raise rents by 25 percent at its newly acquired buildings dissolved quickly as the vacancy rate in Orange County swelled to 16 percent, from 7 percent in 2006, making it harder to make mortgage payments. Maguire sold a number of its Equity Office buildings, some at a loss, and the board forced its chairman and founder, Robert F. Maguire III, to step down.

Ouch

Big rally today, obviously.

"Timmmmay" Geithner is supposedly announcing a plan on Monday afternoon. What a credulous group of investors we have to bid up garbage equities so much on such a flimsy basis.

I shorted more REITs (MPG, MHGC, MAC). I am increasingly bearish on the office, hotel, and retail REITs based on what I see in the restructuring business.

President Obama's economic recovery package will actually hurt the economy more in the long run than if he were to do nothing, the nonpartisan Congressional Budget Office said Wednesday.

Short

I am very short right now. Have been covering COF and selling BBY, MHGC, MPG, etc.