Commercial Real Estate “Does Appear to be Headed Further South”

Calculated Risk has me convinced that this is something we ought to be worried about:

Bernanke: CRE May Pose Risk, by Calculated Risk: From Bloomberg: Bernanke Says Commercial Property May Pose Risk for Economy

Federal Reserve Chairman Ben S. Bernanke said a potential wave of defaults in commercial real estate may present a “difficult” challenge for the economy, without committing to additional steps to aid the market. ...

It “may be appropriate” for the government and Congress to consider “fiscal” steps to support the industry, Bernanke said today. Ideas for fresh support for the market could include government guarantees for commercial mortgages, Bernanke also said today ...

“As the recession’s gotten worse in the last six months or so, we’re seeing increased vacancy, declining rents, falling prices -- and so, more pressure on commercial real estate,” Bernanke said yesterday. “We are somewhat concerned about that sector and are paying very close attention to it. We’re taking the steps that we can through the banking system and through the securitization markets to try to address it.”

A few key CRE stories this month...[list of news items] ...And a comment from the USG (building materials supplier) conference call this morning:

"Nonresidential construction does appear to be headed further south, perhaps significantly so."

No kidding.

Bottom and Top Line Beat Rates — Not Everything Is Positive

Yesterday we highlighted the earnings per share beat rate for US companies that have reported their quarterly numbers since July 8th. In the first chart below, we have updated the numbers to include today's reports. As shown, the beat rate increased a bit more today up to 72.3%. The highest beat rate we've seen since 2001 was 73% in Q3...


Swaps and VOL and MBS

Swap spreads are mixed today. Two year spreads are unchanged at 43 1/2. Five year spreads are 1 3/4 basis points narrower at 46. Ten year spreads are 1/4 basis point tighter at 20 1/4. Thirty year spreads are 1/4 basis points wider at NEGATIVE 24.

One salesperson noted some conversations regarding the strength in the yen. Some believe that yen at these levels or stronger will lead to a round of receiving by the exotic community. Those very strange folks were the proximate cause of the kerfuffle which drove 30 year spreads (briefly) into the negative 60s and 70s last year.

Personally, I sleep a little better at night when I am long a little bit of vol.

Mortgages are 3 ticks tighter to swaps.

The three month/ten year ATM swaption straddle is 622 mid. When I quoted it earlier today it was 626.


Feelin’ The Earth Move

The Day After in CAT, and guess what? You can buy some options!

Cateripillar (CAT) is down $1.03 to $38.43 and 149K puts traded today, compared to 22K calls. The order flow is being driven primarily by put sellers. According to an exchange-floor contact, one player sold 40K Sep 33 puts for 75 cents, sold 40K Sep 35 puts for $1.05, and sold 20K Sep 39 puts for$2.60. All this was tied to a block of 620K CAT shares at $69.05. Looks bullish. Recall that CAT rallied yesterday on earnings news. Implied vols are up to 40.5, from about 39.5 yesterday.


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Rate hike odds post Bernanke testimony

Following two days of testimony (and the WSJ editorial) from Bernanke where he repeated that interest rates will stay low for an extended period of time, that inflation will remain subdued for a few years more and that unemployment will remain elevated for a period of time, the odds of a year end rate hike are down to 13% from 27% one week ago and 46% one month ago. A 25 bps hike to .50% is not fully expected until the March ‘10 meeting. The January ‘10 meeting rate hike odds are at 60%. In the discussion on exit strategies too over the past few days, ending QE and many of its liquidity facilities will be a cake walk compared to normalizing the fed funds rate in terms of its impact on the economy.


Afternoon Reading: The Bottom Line of a Goldman Image Problem

Goldman’s image problem: “Sticks and stones will break your bones but names will never hurt you.” Parents have repeated that adage to their children for generations, and it is the position Goldman Sachs Group typically has taken when critics spew vitriol its way. This time, though, that approach might not work, writes Bloomberg’s David Reilly. Why? This time the criticism might end up hurting Goldman’s earnings and its share price. Writes Reilly: “Goldman is at the center of the debate over regulation of too-big-to-fail institutions that benefited from what was estimated this week to be a $23.7 trillion bailout of the financial system…The danger for Goldman is that it becomes a focal point for populist bailout ire, leading the government to take a tougher stance on regulation.”

Second Acts on Wall Street: Just who will forgive CEOs for running their company into the ground or for bringing the nation’s financial system to the brink or for sending the global economy into a tailspin? Perhaps private equity, writes Erin Griffith over at peHUB. Recently Robert Nardelli (granted he didn’t bring the financial system to its knees or send the global economy into a tailspin, but his tenure at Chrysler was hardly noteworthy), former Wachovia CEO Ken Thompson and Fannie Mae’s former head Daniel Mudd all have found shelter at PE firms.

Which College Grads Earn the Most? Everyone likes rankings, whether of football or basketball teams or things academic. PayScale, a site that collects data on salaries for different professions, now offers a ranking of which colleges and degrees end up paying off most for grads, writes Economix. Dartmouth graduates have the highest median midcareer salary and in terms of majors, while Loma Linda grads have the highest median starting salary. In terms of majors, study engineering or really any quantitative-oriented major if you want a high starting salary. And you might want to avoid majoring in drama, social work and education if a high midcareer salary is your goal.

Ethics 101: There is nothing like a financial crisis to put questions of ethics in business front and center. At least one school wants to address the problem. The New England College of Business and Finance, which caters mainly to about 650 adults doing online course work, is offering a master’s degree in business ethics and compliance, the Boston Globe reports.

A PE Deal: It might not be big, but it is private equity. Apax Partners has agreed to acquire Bankrate for about $571 million. This comes after WSJ reported that P&G’s prescription-drug business may be drawing a little PE interest.


Gloves Are Off Over New Consumer Financial Product Agency

House Democrats on Wednesday fought back against the banking industry and said Democrats would intensify their efforts to create a new regulator for consumer financial products.

[Barney Frank]
Frank

The idea was proposed by the Obama administration in June but has come under heavy attack from the financial industry and Republicans, who have argued that it would stifle innovation and shut off access to credit.

House Financial Services Committee Chairman Barney Frank (D., Mass.) held a press conference with other Democrats on his panel, including Maxine Waters of California, Brad Miller of North Carolina, Keith Ellison of Minnesota and Luis Gutierrez of Illinois. Rep. Frank said the proposal has become “somewhat more controversial than I expected it to” become.

Rep. Frank: “People opposed to this, banks and elsewhere, have troops on the ground and they have brought them into this effort. I accept the fact that they want to have a big national debate over this. And so that’s what we are going to have…I welcome a national debate. Frankly if I were the bankers I would not invite a debate over whether or not [the banks have] been all that great in the consumer area and whether or not consumers should just trust” them.


KeyCorp’s quarterly loss is more than the Street expected

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KeyCorp (NYSE: KEY) stepped into the earnings spotlight this morning, announcing that its second-quarter loss checked in at 69 cents per share (68 cents per share excluding charges). A year ago, the bank lost $2.71 per share in the second quarter. Although the results were better than those from a year ago, they were not better than the consensus estimate, which called for a loss of 41 cents per share.

The company also announced that it was cutting the amount of preferred shares that it plans to exchange by 71%. KeyCorp's CEO (Henry Meyer III) stated that the company's results "reflect the weak economic environment and the steps that it has taken to address issues in credit quality, strengthen capital and control costs." Like many regional banks, KeyCorp suffered thanks to the credit crunch; even though the bank was not a major player in the subprime-mortgage fiasco. The company added that loan-loss provisions were $850 million, which was 31% greater than a year ago.

Continue reading KeyCorp's quarterly loss is more than the Street expected

KeyCorp's quarterly loss is more than the Street expected originally appeared on BloggingStocks on Wed, 22 Jul 2009 13:30:00 EST. Please see our terms for use of feeds.

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Would You Stand on Short Flights if It Meant Cheaper Fares?

Irish-based discount airline Ryanair recently polled 120,000 passengers on its Web site with the following question: would you be willing to stand on short flights?

Rollercoaster rider or airline passenger? (Getty Images)

The answer was an overwhelming “yes” — if the tickets were free. Two-thirds of respondents said they’d stand on flights of less than an hour if their tickets were free; 42% were willing to do so for tickets that were half-off.

According to Marketwatch.com: A spokesman for Ryanair, Stephen McNamara, said the airline is looking to replace traditional seats with “vertical ones,” which on a typical flight would allow between 50 and 60 additional passengers.

The vertical seats sound like something you might find in an amusement park: Mr. McNamara said the airline envisages having the passengers supported and restrained, and not simply holding a rail, so they could handle turbulence or an emergency landing safely, Steve Gelsi reports.

Ryanair would need approval both from U.S. and European Union authorities, as well as Boeing, which makes its aircraft. Mr. McNamara said it could take three years before they could even pilot the program, and then additional time to launch it.

Ryanair, which yesterday reported that it will cut capacity at Stansted airport by 40% this winter and reduce weekly flights by 30%, is no stranger to experimenting with ways to shake up air travel. Another controversial idea -– charging for toilet use on flights –- is “still under consideration,” according to Mr. McNamara.


Agency Spreads

Agency spreads are unchanged in the 2 year sector and a basis point tighter in the 5 year sector. Ten year spreads are a basis point wider.

Federal Home Loan Bank priced a 3 year note today at T+35. This issue has not budged and is 35/34.5.

One analyst with whom I speak regularly thinks that notwithstanding the tightest spreads in two years, the risk is that spreads move tighter from here.

There is very little supply and Freddie Mac has engaged itself by buying back debt. The GSE has purchased floaters and subordinated paper thus far. One analyst suggested that Freddie might be involved shrinking its balance sheet as mandated by the conservatorship agreement when the wheels fell off the GSE bicycle last September.

The conservatorship agreement stated that Freddie would begin to reduce its balance sheet by 10 percent each year beginning in 2010. Here is a paragraph from the statement which then Secretary Paulson issued last September as FNMA and Freddie Mac were passing into financial oblivion and redundancy:

“To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.”

Anyway,one observed thinks that the “unwinding” might be underway as we speak.


FBR Defends Upgrade of AMD: Still A Turnaround Story

Two days after raising his rating on AMD (AMD) to “Outperform” from “Market Perform,” FBR Capital Markets analyst Craig Berger responded to last night’s disappointing Q2 results and weak forecast by reiterating his rating and his $5.25 price target.

“While our short term–oriented upgrade call on AMD’s quarter did not pan out,” writes Berger, “We stand by our analysis that the stock had $0.50 to $0.75 of downside risk with soft results, compared to $2 to $4 of upside return opportunity with robust results.”

Well, he’s right on the downside — AMD shares today are down 54 cents, or 13.4%, at $3.54.

As for upside…Berger writes that the disappointment last night in gross profit — it was down over 10 percentage points form the prior quarter — is something of a blip, owing to the fact that AMD had to pay more than expected to GlobalFoundries, which is the former manufacturing division of AMD that was spun out last October in AMD’s restructuring. AMD was supposed to only have to pay the cost of a wafer to GlobalFoundries, but instead paid wafer costs and then some, bringing down gross profit.

Berger thinks costs will be brought under control this quarter and next as AMD uses more of the chip capacity GlobalFoundries is offering, making each wafer run more economical, thus possibly boosting AMD gross profit to 40%.

Berger lowered his expectations for free cash flow to $50 million in the second half of 2010 from Monday’s estimate of $160 million, and to burn $30 million in all of 2010, versus being about breakeven for the year.

The point is that AMD is a turnaround stock. While the company is losing share to Intel (INTC), will never have Intel’s 50% gross profit margin, and is burning cash — it will burn about $210 million this year and next combined — the company can still service its $2 billion in debt load. It can survive, in other words, and any sign of an improvement in profit above mere survival will boost its beleaguered shares. Berger writes that a 3 percentage-point increase in the stocks EV/Ebtida — from .9 x currently to 1.2 x — could lead to a doubling in the stock.

AMD stock is up 63% this year and down about 20% in the last 12 months.

Previously:
Intel: JMP Ups to “Outperform” as AMD Crumbles, July 22, 2009.

CDS report: Markets mixed as traders digest earnings

This CDS report was written by Markit's Gavan Nolan European credit indices gave back some of their recent gains, prompted by profit-taking and mixed signals from the US. The Markit iTraxx Europe index was back above 100bp, closing at 101bp. The Markit iTraxx Crossover and HiVol indices both widened,...

America’s Got Talent


I've long recommended just letting everyone write their tax checks directly to Wall Street management. Would save a mint in clerical expenses. Looks like we should start at JP Morgan.

Morgan Stanley revealed today that it had set aside 72 percent of its second-quarter revenue for compensation and benefits. This might just be a new record.

The average compensation for Wall Street firms hovered around 48 percent his decade, according to Bloomberg. Many thought that compensation on Wall Street might actually diminish thanks to government bailouts. But instead firms have been increasing the share of revenues that they pay themselves.

Yes, it's the War for Talent. We live in an NJ suburb where like 98% of the people do something on Wall Street. And there's an awful lot of underployed folk out here now, so I guess to fight that War, you need to get back in the door first.

I was under no impression that the first step in recovery would be anything but replenishing the paychecks, but I honestly did not expect it so soon.

But hey, they paid back TARP, they can take their parting gifts from the Fed and do what they want with it now. Lever up, Baby!

Bank of New York Mellon (BK) reports weak Q2 earnings, slashes dividend

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BK logoBank of New York Mellon (NYSE: BK - option chain) stock is lower today after the company reported a second-quarter profit this morning of $176 million, or 15 cents per share. Excluding one-time items, BK earned 23 cents per share, missing analysts' estimates of 53 cents per share. BK also announced its quarterly dividend of 0.09 per share down 62% from the previous 0.24. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on BK.

This morning, BK opened at $27.55. So far today the stock has hit a low of $26.48 and a high of $27.67. As of 11:40, BK is trading at $26.89, down $2.22 (-7.6%). The chart for BK looks bullish and S&P gives BK a positive 4 STARS (out of 5) buy ranking.

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Bank of New York Mellon (BK) reports weak Q2 earnings, slashes dividend originally appeared on BloggingStocks on Wed, 22 Jul 2009 13:00:00 EST. Please see our terms for use of feeds.

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Death to CDS, Maxine Waters edition

One week ago, Congresswoman Maxine Waters (D-CA), introduced H.R. 3145, or the Credit Default Swap Prohibition Act of 2009. We've tried to refrain from commenting, but since we keep being reminded of its existence... For those of you unfamiliar with Ms Waters' previous output, see here for her call to nationalise US oil industries and this WSJ story on her links to Tarp-recipient OneUnitedBank and here for her endorsement of Fannie Mae and Freddie Mac's leadership - in 2004 (quote:...
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