Recession watch: May

[Integral]

You guys know the drill by now. Bring articles, data, discussion, analysis, gripes, whatever!

Previous Threads
Recession Watch: April
Recession Watch: March
Recession Watch: February
Recession Watch: January

A look backward: April in Graphs
via Calculated Risk

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Key Indicators (US)
First Quarter GDP: -6.1% (annualized, advance)
March unemployment rate: 8.5% (U3); 15.9% (U6) (seasonally adjusted)
March CPI: -0.1% (overall, monthly), +2.2% (core, annualized), -0.4% (year-over-year)

I'm less familiar with the Canadian and Eurozone data, so if anyone wants to post that feel free.

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Indicators this week
ISM Manufacturing Index (Friday, 8:30 EST)

Indicators next week
March construction (Monday)
ISM Services Index (Tuesday)
Employment Situation (Friday)

 

[really]

Two of my colleagues were given notice today.

They will be made redundant at the end of May.

 

[RedRalph]

From Reuters

Quote:
WASHINGTON/NEW YORK (Reuters) - Bank of America Corp has been deemed to need as much as $34 billion in additional capital, according to the results of a government stress test, a source familiar with the results told Reuters late on Tuesday.

Bank of America spokesman Scott Silvestri declined comment.

A possible $34 billion capital shortfall is certain to increase pressure on CEO Kenneth Lewis, who was last week ousted by shareholders as chairman of the biggest U.S. bank.

That ouster could lay the groundwork for Lewis's eventual departure from the company he worked at for 40 years, including the last eight as chief executive.

It may also unnerve investors who had hoped the results of the stress tests on Bank of America and 18 other banks might show the industry was in less dire condition than had been feared. Shares of major U.S. banks have nearly doubled since bottoming out in early March.

U.S. equity market futures extended losses on Wednesday and the yen gained following the news.

About 10 of the 19 banks being stress-tested are expected to need more capital buffers, a person familiar with the official talks has said. The person was not authorized to speak because the results are not public.

Many analysts have speculated that other banking companies that may need more capital, either because they do not have enough tangible common equity or are experiencing rising loan losses, include Citigroup Inc, Wells Fargo & Co, Fifth Third Bancorp, GMAC LLC, KeyCorp, Regions Financial Corp and SunTrust Banks Inc.

CEO HAD SAID NO CAPITAL NEEDED

The government has spent three months conducting stress tests on the 19 largest U.S. banks to determine their revenue, losses and capital needs, should economic conditions deteriorate even further than many economists expect.

Officials plan to release results of the tests late on Thursday, and are expected to reveal both aggregate and individual banks' figures.

Bank of America has been at the top of the list of those believed to need more capital, as it faces significant credit losses and a controversial takeover of Merrill Lynch & Co, which closed on January 1.

The $34 billion figure more than triples previously published reports of Bank of America's capital needs.

Lewis had told analysts on an April 20 conference call that "we absolutely don't think we need additional capital," but added that credit conditions remained weak, especially in credit cards. "Make no doubt about it, credit is bad, and we believe credit is going to get worse," Lewis said.

Bank of America that day reported a surprisingly large first-quarter profit, but much of the amount came from one-time gains and an accounting change, which may not be repeated.

BofA's nonperforming assets surged 41 percent in the quarter to $25.74 billion.

The Federal Reserve and Treasury declined comment.

Most of the 19 U.S. banks being stress-tested intend to hold press conferences on Friday to explain the results of the government's assessments, said a source briefed on the plans, adding that many of the banks are in the process of crafting capital recovery plans.

CAPITAL RAISING

It's unclear how Bank of America might raise necessary capital, including whether it does so by selling assets or by issuing more common stock.

The bank has said it may sell its First Republic Bank business. It also could sell some or all of its holdings in China Construction Bank, China's No.2 lender.

If it is unable to sell enough assets, it might be forced to convert some of the government's preferred shares into common stock. This would dilute existing shareholders, and could leave the government as one of the bank's biggest shareholders.

J. Steele Alphin, the bank's chief administrative officer, told The New York Times that Bank of America would have plenty of options to raise capital on its own before it would have to convert any of the government investment into common stock.

"We're not happy about it because it's still a big number," Alphin said. "We think it should be a bit less at the end of the day."

Federal Reserve Chairman Ben Bernanke said on Tuesday that most of the capital-needy banks will be able to raise additional capital through "either issuance of new capital or through conversions and exchanges, or the sales of assets and other measures."

Bank of America has received $45 billion of taxpayer money, including an emergency federal bailout that involved a $20 billion infusion in mid-January, two weeks after the Merrill purchase.

Critics believe Lewis overpaid when he bought Merrill for about $29.1 billion of common and preferred stock, agreeing to the takeover after less than 48 hours of negotiations and due diligence. Through Tuesday, BofA shares had fallen 68 percent since the Merrill purchase was announced on September 15.

Lewis is also criticized for failing to back away from the purchase after realizing in December that Merrill's finances were deteriorating fast, ultimately resulting in a $15.84 billion fourth-quarter loss.

Critics accuse Lewis of improperly failing to disclose Merrill's losses, and also for allowing Merrill to pay some $3.6 billion of bonuses to its own staff even as losses were mounting.

Lewis has said under testimony he felt pressure from officials including Bernanke and former U.S. Treasury Secretary Henry Paulson to close the merger, so as to not upset the financial system. This, however, prompted criticism from law professors and governance experts who said Lewis owed a fiduciary duty to his shareholders, not his regulators.

Bernanke on Tuesday told lawmakers he did not pressure Lewis to withhold information from shareholders about problems at Merrill.

Bank of America is more heavily exposed to the U.S. economy than JPMorgan Chase & Co and Citigroup, which are better diversified internationally. Analysts widely believe the government will not require JPMorgan to raise more capital.

So apparently these stress tests may not produce the desired and expected results. thanks for the 'headsup', Kronic

 

[mrt144]

PIMCO's closed end funds are on fire which is bad for their yields but that's life.

 

[warpus]

Well, the Dow Jones is up to 8,400, which is very positive, IMO

 

[GenMarshall]

But the jobs are disapearing!

Dey took er jerbs!

 

[mrt144]

Well, the Dow Jones is up to 8,400, which is very positive, IMO

I don't. It's like saying the DOW at 15,000 was very positive despite the fact that it's about 45% down from that value. If it is a very positive sign then why did it fall so much?

 

[PiMan]

Unemployment figures improve in Australia:

Surprise jobs boost
Chris Zappone
May 7, 2009 - 12:01PM

UPDATE Australia's unemployment rate has posted a surprise drop, the latest sign that a recovery may be on the horizon.

The unemployment rate dipped to 5.4% in April from 5.7% in March, as companies grappling with the recession held on to workers in anticipation of a rise in demand. Economists had expected a 0.2% increase that would have would have pushed the rate to 5.9%.

Today's result is the strongest since last July, before the global financial crisis accelerated.

The better-than-expected reading on the jobs market comes the same week strong retail sales and trade surplus figures were released, raising hopes for an economic revival.

Full-time jobs surged by 49,100, easily eclipsing the 21,800 jobs lost during the month. The net gain was 27,300 jobs.

The Australian dollar jumped on the news, gaining half a US cent in recent trade and the sharemarket also extended its advance.

Despite the healthy take on the labour market, unofficial forecasts put the unemployment rate at 9% by the end of 2010 once the full effect of the downturn filters through the economy.

''Defying expectations, the Aussie economy added jobs in April and the unemployment rate went down,'' said Moody's economy Economists Matt Robinson.

''It's a damn good result.''

''This is going to leave a lot of people gobsmacked.''

Mr Robinson said it was possible that employers with long memories of a tight labour market only a year ago had been ''trying desperately hard not to lay off staff because those quality people will be the most productive in an upturn.''

''You've got to take your hats off to policymakers, both government and the central bank, that have taken aggressive actions that look as if they're working,'' he said.

Since the acceleration of the global financial crisis late last year, the Federal Government has announced $78 billion stimulus packages and spending aimed at keeping people spending and the economy cushioned from a hard landing.

The unemployment rate went down without a noticeable drop in the participation rate, Mr Robinson said.

The participation rate, or a how much of the population is available for work, eased by 0.1 percentage point to 65.4% in April, the Australian Bureau of Statistics data showed.

Hope on horizon

Retail sales jumped 2.2% in March as consumers spent $19.3 billion for the month, the ABS said yesterday, an increase most economists linked to the Government's stimulus package.

Also, the trade surplus widened to $2.5 billion in March, showing that demand for Australian resources remained relatively strong despite the slowdown.

''The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little,'' the Reserve Bank said on Tuesday, while keeping rates on hold at 3%.

Strong demand for commodities is crucial to the Australian economy's health, accounting for a substantial proportion of revenues.

Today's job figures suggest employers "are smart and realise the downturn isn't going to last forever," said ICAP economist Adam Carr.

Australian companies were eyeing their staffing needs for an eventual recovery, he said.

In another hopeful sign, an index of construction eased for the second consecutive month, offering hope for the hard-hit sector.

The Australian Industry Group-Housing Industry Association performance of construction shrank to 36.5 index points in April, a 6.2 point improvement from March.

This, I was not expecting.

 

[Huayna Capac357]

Does anyone think that US U3 unemployment numbers will reach 10+%?

 

[Cutlass]

I think they'll go to that neighborhood. We haven't seen the bottom, just signs that the fall is getting a bit less steep.

 

[Integral]

Does anyone think that US U3 unemployment numbers will reach 10+%?

To reach 10% U3, we'd have to lose another 2.2 million jobs. We're currently shedding jobs at a rate of about 650,000 per month, so we'd have to experience four months that are about as bad as the last four have been. It's certainly not out of the question.

The BLS employment report for April comes out Friday. I'm guessing U3 will be 8.9-9.1%.

edit: rather,
my "better" prediction: -450,000 jobs -> U3 = 8.84%
my "baseline" prediction: -650,000 jobs -> U3 = 8.97%
my "worse" prediction: -750,000 jobs -> U3 = 9.03%

The ADP report today predicted job losses of -491,000. Both the ISM Manufacturing and ISM Services indicies were more optimistic this month on employment (both show losses, but at less severe rates than March or February). Adjust for a probable decline in the labor force, and a U3 of bit over 9% is probably a good upper bound.

 

[Kerozine]

TSX over 10,000, back where it was 6 months ago

A rise of more than 200 points Wednesday pushed the Toronto Stock Exchange composite index over 10,000 for the first time in six months.

The S&P/TSX index closed up 265.71 points at 10,146.43, driven by a big gain in energy issues.

Oil and gas stocks rose as oil prices gained $2.50 US a barrel to $56.34 — a new high for 2009 — in futures trading on the New York Mercantile Exchange.

But the strength was widespread, with more than two issues advancing for every one that fell.

The energy sub-index was up 4.6 per cent, but gold rose 4.4 per cent and mines 3.8 per cent. Financial issues were also strong.

The index last closed over 10,000 on Nov. 4, when it ended at 10,116.

The move through 10,000 was given a big boost Monday, when better-than-expected U.S. data on construction spending and home sales pushed the index up 373 points, the biggest one-day gain this year.

But even at 10,146, the index is still more than 4,200 points below the close a year ago. On May 6, 2008, the index ended the day at 14,414.

Toronto's gain was 2.4 per cent, twice the rise in the Dow Jones industrial index in New York. The Dow added 101.63 points to 8,512.28.

Nasdaq rose 4.98 points to 1,759.10.

Source: http://www.cbc.ca/money/story/2009/05/06/tsx-breaks.html

No more stimulus needed, Bank of Canada head says

The Canadian economy is expected to do well enough that the central bank will not have to boost growth by providing additional stimulus, governor Mark Carney said Wednesday.

The bank expects that the deep cuts in interest rates to 0.25 per cent and the promise to keep rates low for a considerable period "is the appropriate policy stance to move the economy back to full production capacity," he said in remarks prepared for delivery to the Senate Committee on Banking, Trade and Commerce.

He also cited government stimulus spending as a factor.

The gross domestic product is going to fall three per cent this year, but by fall, the bank expects the economy to start growing again, Carney said. Growth will hit 2.5 per cent next year and 4.7 per cent in 2011, he predicted.

Total inflation will drop below zero this year, although he did not specify when or by how much in his prepared remarks.

But as growth picks up, core inflation and the consumer price index — at 1.2 per cent in March — are expected to move up to the bank's two per cent target in the third quarter of 2011.

Source: http://www.cbc.ca/money/story/2009/05/06/carney-senate-committee.html

Though I suppose stock markets aren't an overall good indicator of the current state of an economy..

EI figures keep rising as jobs disappear

The number of Canadians getting employment insurance benefits grew in February by 44,300, or 7.8 per cent, when compared to the previous month, Statistics Canada said Tuesday.

Since job growth wilted beginning in October 2008, the number of regular EI beneficiaries has climbed 21.9 per cent to hit 610,200 in February.

"Over the same period, the number of regular EI beneficiaries has increased in almost all provinces and territories, with the largest percentage gains in Alberta, British Columbia and Ontario," Statistics Canada reported.

To get EI benefits, individuals must first submit a claim. In February, there were 325,700 claims received, the highest number on records dating back to 1997. The number of claims received in February was up 51,000, or 18.6 per cent from January.

The biggest year-over-year increase in people getting EI benefits among major metropolitan areas across the country was seen in Calgary, where the number of EI recipients shot up 114 per cent to a seasonally-unadjusted 11,690. In Edmonton, a 96.4 per cent increase brought the number of beneficiaries to 10,900.

"In Alberta, the drop in employment in recent months was spread across a number of sectors, including construction, trade, manufacturing and professional, scientific and technical services," Statistics Canada said.

Behind only Calgary was the hard-hit city of Windsor, Ont., where the number of people getting EI benefits was up 103.8 per cent. Among other Ontario cities, Kitchener followed with an increase of 96 per cent, with Hamilton and London seeing increases of 83.4 per cent and 82.9 per cent, respectively. In Toronto, the number of people getting EI grew 60.6 per cent over the 12 months.

In B.C., Victoria saw an increase of just under 89 per cent, while Vancouver posted a jump of 75.3 per cent.

Canada's unemployment rate in March climbed to a seven-year high of eight per cent as the economy shed another 61,300 jobs.

Source: http://www.cbc.ca/money/story/2009/04/28/ei-claims.html

 

[mrt144]

Yeah, the stock market is phony as a 3 dollar bill right now.

 

[RedRalph]

think so? I'd like to hear some opinions on that.... the markets have skyrocketed in the last two months, do people think its sustainable? Bottom definitely been reached at 6500 (dow)? Is there going to be another big fall?

 

[Theige]

A pullback at this point would be downright healthy... even the most bullish traders on cnbc and such believe so.

But I don't think we'll be retesting the 6500 low.

 

[hossam]

the rescission isnt real. i have not felt its effect, nor has anyone else i know been affected by the recession

 

[mrt144]

think so? I'd like to hear some opinions on that.... the markets have skyrocketed in the last two months, do people think its sustainable? Bottom definitely been reached at 6500 (dow)? Is there going to be another big fall?

I don't know about big fall but given that non stock market indicators are still doing very poorly and the apparent "good news" is that they are just less bad than before but still piling on to the worst...

The absolute pain we are feeling is just increasing while the month to month (and this is mostly jobs) and year over year (this is mostly housing starts, permits and sales) are better on a relative basis. In some cases things are getting worse like commercial real estate.

Right now we are in training wheels mode almost, where if we were to drop all the implicit and explicit support from government and the fed we'd be back to september 2008. Until I see a scale down in government intervention with an increase in private sector health I'm not going to think we are out of the woods. Nor do I think that all the changes that the administration is proposing going to restore stability in the short term (but perhaps in the long term).

The speed with which some people have claimed "Recession Over" because of the past 2 months makes it seem implausible to me that we are at the end of it. What happens if there is another leg down? The cognitive dissonance would cause even less trust in the markets and panic selling. This is part of the reason why rallies rise and fall in an overall bear market.

 

[mrt144]

Also this today isn't a good sign.

http://www.treasurydirect.gov/instit/annceresult/press/preanre/2009/R_20090507_1.pdf

The results of the auction were a little bit "messy" to borrow a term from Seekingalpha.

http://seekingalpha.com/news/market_currents/post/23773

 

[Cutlass]

the rescission isnt real. i have not felt its effect, nor has anyone else i know been affected by the recession

What about the millions of people who are feeling it?

 

[Integral]

Stress test results are out, not that they've been leaked all weak or anything.

Fed:

The results of a comprehensive, forward-looking assessment of the financial conditions of the nation's 19 largest bank holding companies (BHCs) by the federal bank supervisory agencies were released on Thursday.

The exercise--conducted by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation--was conducted so that supervisors could determine the capital buffers sufficient for the 19 BHCs to withstand losses and sustain lending--even if the economic downturn is more severe than is currently anticipated. In a detailed summary of the results of the Supervisory Capital Assessment Program (SCAP), the supervisors identified the potential losses, resources available to absorb losses, and resulting capital buffer needed for the 19 participating BHCs.

The SCAP is a complement to the Treasury's Capital Assistance Program (CAP), which makes capital available to financial institutions as a bridge to private capital in the future. Together, these programs play a critical role in ensuring that the U.S. banking sector will be in a position of strength.

Report:

The results of the SCAP suggest that if the economy were to track the more adverse scenario, losses at the 19 firms during 2009 and 2010 could be $600 billion. The bulk of the estimated losses –approximately $455 billion – come from losses on the BHCs’ accrual loan portfolios, particularly from residential mortgages and other consumer‐related loans. The estimated two‐year cumulative losses on total loans under the more adverse scenario is 9.1 percent at the 19 participating BHCs; for comparison, this two‐year rate is higher than during the historical peak loss years of the 1930s. Estimated possible losses from trading‐related exposures and securities held in investment portfolios totaled $135 billion.

...

After taking account of losses, revenues and reserve build requirements, in the aggregate, these firms need to add $185 billion to capital buffers to reach the target SCAP capital buffer at the end of 2010 under the more adverse scenario. But a number of these firms have either completed or contracted for asset sales or restructured existing capital instruments since the end of 2008 in ways that increased their Tier 1 Common capital. These actions substantially reduced the final SCAP buffer. In addition, the preprovision net revenues of many of the firms exceeded what was assumed in the more adverse scenario by almost $20B, allowing them to build their capital bases. The effects of these transactions and revenues rendered the additional capital needed to establish the SCAP buffer equal to $75 billion.

Full report is here. PDF, 38 pages.

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Bernanke gave a nice speech at the Chicago Fed on banking supervision. Link is here.