FDIC Comments Imply a Big Haircut for IndyMac's Loans

The following items are from this WSJ article about the IndyMac failure:

• IndyMac had roughly $19 billion of deposits. Nearly $1 billion of those deposits were uninsured, affecting about 10,000 people, the FDIC said.
• The Pasadena, Calif., thrift was one of the largest savings and loans in the country, with about $32 billion in assets.
• The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC's $53 billion deposit-insurance fund.

We know from a recent Reuters article how big IndyMac's Federal Home Loan Bank advances were: "The loans, or "advances" -- totaling more than $10 billion as of March 31 by the San Francisco FHLB -- are backed by mortgages pledged by IndyMac."

We also know that "the FHLBs have a 'super lien' when institutions fail. To protect their position they have a claim on any of the additional eligible collateral in the failed bank. In addition, the FDIC has a regulation that reaffirms the FHLBs priority and the FHLBs can demand prepayment of advances when institutions fail."

Using what we know, we can infer the percentage haircut that the FDIC is placing on Indymac's assets. It's not pretty:


Now we see that these assets are every bit as bad as bearish bloggers have been saying.

Now we see that there is not a "liquidity crisis" or a "subprime crisis", but a housing crash and a solvency crisis.

Today's Charts

• Market Share of Cars vs Light Trucks (1976-2008)
• House Price to Income Ratio [from Where should house prices really be and how did they get so high?]
• Perot Charts

Things I'm Reading Today

• Buffett offered to bet any taker $1 million that over 10 years and after fees, the performance of an S&P index fund would beat 10 hedge funds that any opponent might choose.
• Natural gas is a major feedstock in ammonia production--the hydrogen (H) in ammonia (NH3) comes from natural gas. It is not easy to combine N (N2 gas from the atmosphere) and H to make ammonia, so considerable energy (mostly natural gas) also is consumed. The average natural gas consumption for anhydrous ammonia production is approximately 33.5 million British thermal units (MMBtu) per ton. Therefore, the ammonia production cost is closely tied to the price of natural gas.
• Unemployment rate and recession chart.
• GM Volt may be too expensive and not ready in time.

California Comptroller Report for April 2008

The California State Controller has released his Statement of General Fund Cash Receipts and Disbursements for April. Here is the summary analysis.

Totals from the three largest taxes show a declining rate of growth. In April of 2006 the year-to-date increase in the big three taxes was 10.5% higher than the same period of the prior year. In 2007, the growth was 3.1%. By April 2008, the fiscal year-to-date growth had slipped
to 2.1%.

Tax Receipts Show California Downturn Continues

This is from the California State Controller's report on March 2008:

Total General Fund revenue for March 2008 was $375 million below (-6.5%) the revenue seen in March 2007. Sales taxes and corporate taxes accounted for most of the decline. Sales taxes were below March 2007 by $167 million (-7.6%) while corporate taxes lagged by $166 million (-10.7%). Income taxes were $70 million (4.2%) above last March. In total, the three largest taxes were $263 million lower (-4.9%) than March 2007.

Commodity Selloff

I don't know whether it will continue.

Gary North thinks that it might.

Fed is Almost Out of Ammo

"I know what you're thinking, punk: you're thinking, 'Did he fire six shots or only five?' Now, to tell you the truth, I've forgotten myself with all this excitement. But being this is a .44 Magnum, the most powerful handgun in the world, and will blow your head clean off, you gotta ask yourself a question: 'Do I feel lucky?' Well, do ya, punk?"

California Sales Tax Receipts Down Again in February

This is from the February California Controller's report.

Sales taxes had the weakest year-over-year revenue growth, falling $59 million below (-1.6%) last February. Income taxes were up $58 million (3.7%) and corporate taxes grew by $26 million (17.5%). In total, the three largest taxes were $25 million higher (0.5%) than February 2007.

These year-over-year changes are not as bad as they were in January. However, February 08 was 3.6% longer than February 07 (leap year), making the comparison easier.

Wednesday Interesting Articles

Real interest rates are now negative [Mankiw].

"Nothing in economic theory precludes negative real interest rates, or even suggests they should be anomalous. Nominal interest rates cannot be negative, because people would just hold cash instead of bonds,* but real interest rates can be negative. If real interest rates were very negative, investors could start investing in inventories of goods, but this arbitrage is not easy. Storing goods is costly, and many things in the CPI basket, such as services, are not storable at all.

In standard models of asset pricing, negative real interest rates are most likely to arise if growth expectations are particularly low or if uncertainty is particularly high."

Amit has a new post up about Downey [Kinnaras Capital Blog].

"...as we've covered, DSL's balance sheet greatly overstates its credit quality by ignoring market prices for the homes these mortgages are secured against. Based on Table II, there's about $2B in "extra" collateral value that DSL is implying its loans are secured against when market prices are much lower. NPAs are rapidly accelerating and the bank is facing a very challenging recast schedule. All of these obstacles are stacked against just $1.3B in capital which is why I've maintained my puts against DSL."

Collection of bearish data from [Mish's Global Economic Trend Analysis].

The Party is Over in Arizona?

From a Joint Legislative Budget Committee Staff report prepared for the Arizona Legislature on February 29, 2008.

• Total January General Fund revenue collections were $849.3 million, or (16.1)% below January of last year. The January decrease represents the largest percentage year over year decline since April 2002. The dramatic drop in January revenues was across the board in all 3 main revenue categories...
  
• Sales Tax collections were $406.9 million in January. This amount was down (7.5)% compared to last January... This is the largest percentage year over year decrease since at least FY 1991.
• There were significant variations in January [Sales Tax] collections by sector. Retail and contracting collections together account for two-thirds of all sales tax revenues. The retail sector declined by (3.8)% and contracting by (24.1)%. The restaurant and bar category also decreased by (11.3)%. The only positive growth in the major categories was in use tax, which increased 5.7%.
• Individual Income Tax collections were $479.6 million, or (11.9)% below last year. January withholding was (4.9)% below last year.

Tax receipts are directly proportional to the gross amount of whatever is being taxed. So this big decline in all forms of tax revenue means a big decline in economic activity.

Note that retail sector collections for January were down drastically despite the Super Bowl being held in AZ.

End of Month Desk Clearing Time

Berkshire has released Buffett's shareholder letter for 2007. A couple interesting points:

• "In 2002 when the Euro averaged 94.6¢, our trade deficit with Germany (the fifth largest of our trading partners) was $36 billion, whereas in 2007, with the Euro averaging $1.37, our deficit with Germany was up to $45 billion. Similarly, the Canadian dollar averaged 64¢ in 2002 and 93¢ in 2007. Yet our trade deficit with Canada rose as well, from $50 billion in 2002 to $64 billion in 2007. So far, at least, a plunging dollar has not done much to bring our trade activity into balance."
• "Whatever pension-cost surprises are in store for shareholders down the road, these jolts will besurpassed many times over by those experienced by taxpayers. Public pension promises are huge and, in many cases, funding is woefully inadequate."

Some older items from my inbox:

"...private-jet demand generally lags GDP by two to three quarters. So if we’re in a recession in the first quarter, the jet market will slow in the third or fourth quarter. But Mr. Duckson is already seeing a growing supply of mid-size older jets, which is notable given that inventories of used jets have been slim for the past two years. 'The old, mid-size jets are the part of the market that usually sees a drop first,' he says."

Retailers Taking Their Medicine and Turning Cautious Over Growth:

Announcements over the last couple months include Movie Gallery closing another 400 stores... Starbucks closing 100 stores and slowing expansion plans by 34%; Ann Taylor shuttering 117 stores... Sprint Nextel closing 125 stores... Cost Plus World Market closing 18 stores; Liz Claiborne closing 54 Sigrid Olsen stores; New York & Company axing the Jasmine Sola brand and its 32 stores; Ethan Allen closing 12 stores; PacSun closing all of its 173 demo stores; and Talbots exiting its kids and men's lines through closure of 78 stores... Macy's closing nine stores; ...Rent-A-Center closing 280 stores; Sofa Express closing 44 stores in bankruptcy;

From Mish's Changing Social Attitudes About Debt:

Remember the catchphrase "throwing away money on rent"? The bottom will come when people start bragging about the day they stopped "throwing away money on an overpriced house". That's a long ways away from here in terms of both price and time...

The secular trend towards consumption has peaked.

A year ago only fools saved money. Saving money is becoming more socially acceptable with each passing day. Eventually it will be embraced.

This is from a Calculated Risk post on the JP Morgan conference call:

James Dimon:
This is a lesson that's been learned over and over about broker originations, they perform much worse than our own originations, and if you separate home equity into we call it kind of good bank, bad bank, and broker so I would say it's less than 20%, but a lot of the losses are coming from that 20%, which is high LTV, broker originated businesses. High LTV business is also bad in its own.

Analyst:
And the 20% you referred to a minute ago in round numbers is the sort of specifically high LTV and originated away [by brokers] is that right?

James Dimon:
It's been very consistent In both our own originated and broker originated, high LTV, stated income is bad. It is three times worse in broker than it is in our own.

Analyst:
Wow.

Wow indeed. Guess who has a lot of broker originated, high LTV, stated income loans?

Harley-Davidson also appeared eager to extend easier credit.

In a loan-securitization filing last August, Harley-Davidson said 42.9% of the loans it was selling in the securitization trust had zero down payment, which is double the level of zero down-payment loans recorded for securitizations done in 2006.

Disclosure: short M and DSL

California Sales Tax Receipts Down Again in January

This is from the January California Controller's report.

January Retail Sales and Use Tax revenue was $991.4 M in Jan 08 vs $1,097.7M in Jan 07, down 9.7% year-over-year.

The California sales tax rate is 7.25%, so a drop of $106 M in revenue means that actual retail sales were $1.47 billion lower than the previous year.

I think that this is especially bearish for retailers because they are slashing margins just to get these declining sales volumes.

Personal Income Tax revenue in January was up an anemic 2.2% year-over-year.

See my prior posts on this subject: Florida Sales Tax Revenue Weak in November and Weak October Retail Sales in California.

disclosure: short TIF, CROX, M

Victory for Bears

With 125bp of rate cuts in 7 trading days, the Fed was able to lift only45 S&P points, and today the markets closed down. That's an important psychological defeat and everyone is going to hear about it when they watch the news tonight.

After today's Fed cut, 15 and 30 year mortgage rates are up. But, regardless of whether Fed cuts push mortgage rates up or down, the bigger issue is tighter lending standards. The real estate bubble was predicated on a near absence of lending standards. Unless those conditions come back, the only direction real estate prices are going is down.

The next (scheduled) Fed meeting (cut) isn't until March 18. That means 48 days without anything bullish to look forward to. (Except government intervention, but after three or four flops in a row, those are wearing thin.)

After a huge, insane rally, the mortgage and bond insurers are flopping again. Here's a great Bill Ackman interview re: MBIA on Bloomberg TV. The other great quote from Mr. Ackman is

"Does a company deserve your highest Triple A rating whose stock price has declined 90%, has cut its dividend, is scrambling to raise capital, completed a partial financing at 14% interest (now trading at a 20% yield one week later), has incurred losses massively in excess of its promised zero-loss expectations wiping out more than half of book value, with Berkshire Hathaway as a new competitor, having lost access to its only liquidity facility, and having concealed material information from the marketplace?"

The problem with these insurers is the correlated risks. The same event - a huge decrease in real estate prices - is going to cause unusually high numbers of simultaneous, unusually high claims. The risk that a $20T asset class decreases in value by say 20% is uninsurable.

I think there is currently no panic in the market and there never has been since the bubble started unwinding, in the sense that nothing has become systematically undervalued yet.

What have looked like "panics" in February, August, and last week have been prices beginning to approach reasonable levels only to have bull market conditioning cause people to buy the dips.

For example, I saw a spreadsheet of REO that a liquidating hard money lender was trying to pitch. It was being talked about at the "fire sale" price of 30 cents on the dollar. Except, none of the properties are worth that much.

However, when people are selling shares of weak financials, homebuilders, and insurers for under $1, I will view that as a fire sale price and cover my shorts.

Floyd Norris: A Bear's Questions

From a Floyd Norris post called A Bear’s Questions comes an excellent quote from David A. Rosenberg, a Merrill Lynch economist:

Finally, the question must be asked: if the first 7 percent downleg in home prices could manage to trigger …
1. Almost $100 billion in write-downs in the banking sector;
2. A 65 percent year-over-year surge in foreclosures;
3. The highest residential real estate loan delinquency rate in 20 years; and,
4. A 20 percent plunge in S&P financials …
… then what, pray tell, will the next 20-30 percent have in store?

I think this is dead on. There are tons of people out there catching falling knives.

I added new shorts since January 1 as a recession play: HOG, M, F, TIF, CROX. Short the consumer and long SHY and BIL is a great trade in my book.

Astonishing Inventory in Palm Beach County

From the Palm Beach Post:

In Palm Beach County, the supply of unsold homes - called "inventory" in real estate-speak - has risen to astonishing levels as the housing boom continues to go bust.

"Fifty-five months!" McCabe said.

Actually, there's a 57-month supply - nearly five years - of single-family homes in Palm Beach County, based on the current pace of sales, according to Illustrated Properties Real Estate. The South Florida brokerage tracks listings in the Regional Multiple Listing Service.

Does anyone know what the record is for a market that size?

Florida Sales Tax Revenue Weak in November

From the Florida Department of Revenue, Revenue Collection Report for November 2007:

• November 2007 sales tax collections were 5.18% below the November 2006 levels.
• If you look at the report, FY07-08 tax receipts have been lagging FY06-07 receipts for several months now.
• The only category of sales tax collections that is holding up is consumer non-durables.
  
• Auto, construction, other durables, and business investment have been getting killed.
  

See my earlier post on Weak October Retail Sales in California. Almost 18% of the U.S. population lives in California or Florida.

Bankruptcies Up, Home Sales Down in Phoenix

Bankruptcy filings are way up this year-to-date, says the Arizona Republic:

Through November, the Phoenix area recorded 6,484 total filings, up 60 percent from 4,054 filings through the first 11 months of 2006. Statewide filings came to 9,577 through November, up 61 percent from 5,940 over the same span last year. Chapter-7 filings predominate both in the Valley and statewide, but Chapter-13 filings are growing at a faster clip.

Arizona's homestead exemption protects up to $150,000 in equity for homeowners, but that assumes there is equity.

"So many people (contemplating bankruptcy help) got into homes with a negative-amortization loan," said [Tempe bankruptcy attorney John] Volin.

There are two sources that I use to watch home sales in Phoenix/Maricopa County.

• Number one is Bubble Markets Inventory Tracking (BMIT) which does a great job presenting inventory and sales data every month. (He gets his data "from The Arizona Real Estate Center and [it] includes only SFR and Condos.")
• Number two is Melissa Data, which supposedly comes weekly from the County Recorder. I sample 59 metro ZIP codes.
  

Monthly residential sales in Phoenix metro:


We may be looking at two years of residential inventory in Phoenix right now.

I like to watch the "Tax Facts" releases from the Arizona Department of Revenue, but their newest release is August data.

• General fund revenues for August YTD were up an anemic 0.4% and down 2.7% vs August 2006.
• Transaction Privilege and Severance Tax Collections were up 3.3% year over year, but retail was flat.

It would be nice to see the October and November data. We do know the state is worried about the budget:

The Legislature’s budget staff now puts the state’s worsening shortfall at nearly $1 billion, aggravating an approaching confrontation between Democratic Gov. Janet Napolitano and the Republican-led Legislature on how to keep the treasury in the black.

Napolitano has offered a $600 million plan to borrow, spend from the state’s rainy day reserve and temporarily reduce agency spending to protect funding for important programs, such as education and children’s services.

A year after a massive economic boom the state has to start borrowing?

Weak October Retail Sales in California

From the California State Controller's Office:

The actual year-over-year increase [in California General Fund revenue was] $72 million (1.5%). Retail sales tax receipts were $94 million (-8.7%) below last October.

The General Fund revenue increase was clearly below inflation, so negative in real terms. October's year-over-year sales tax decline follows a 7% y-o-y decline in September.

California's GDP is larger than all but seven countries in the world. The last time California sales tax receipts dipped (2001), there was a recession in the U.S.

From a Census Bureau statistical brief (.pdf, July 1993):

The 1990-1991 recession was particularly challenging for State government finances. For fiscal year 1991, States experienced only a 3.3 percent rate of tax growth - the smallest rate of increase following the 1957-58 recession.

Now that SPF is all over but the crying (subordinated note is yielding 46.6%!), I am going to start shifting focus to weak retailers and manufacturers that cater to what Russ Winter calls "Joe Soccer Mom."