Thursday, January 8, 2009

More Gloomy Data

While initial jobless claims declined by 24,000 to 467,000 in the week that ended January 3rd, the total number of people collecting benefits rose to 4.6 million, the highest number since 1982, indicating that those who have been laid off are having trouble finding jobs.  If ever there was a year that the US did not want to revisit economically speaking, 1982 might be a contender after say, 1929.
Meanwhile, retailers all trimmed earnings forecasts after an extremely disappointing holiday season.  Even the great discounter Wal-Mart announced its profit would miss earlier forecasts after sales rose a meager 1.7% last month.  Sales at the Gap, the largest US clothing retailer fell 14%, while revenues at Macy's dropped 4%.  Although a dismal holiday season at most retailers was not necessarily unexpected, the announcement from Wal-Malt was a shock and the stock is getting pummeled this morning.
Speaking of shopping and malls, REITs are having a lousy day, more than likely thanks to the dismal retailing update coupled with a fairly bearish article in the Wall Street Journal that reports on a sharp rise in delinquencies in commercial mortgages in the fourth quarter.  The article makes three important points in my opinion:
  • The commercial real estate market is $3.4 trillion dollars, larger than the $2.6 trillion market for consumer credit.  Rising delinquencies in this market is no small matter for the market. 
  • Many of the loans made in the past three years were based on unrealistic cash flow estimates and may default as cash flows fail to adequately cover debt service.
  • Banks and thrifts own nearly 50% of all commercial mortgage outstanding.  In particular some 1,400 commercial banks and savings institutions had more than 300% of their Tier 1 capital in commercial mortgages.  This implies that if and when the delinquencies really hit a fever pitch, there will be many more bank failures.
As usual, there is a nugget of humor in the otherwise beak assessment.  A chief credit officer of a small bank in Illinois that has commercial mortgages outstanding representing 752% of its Tier 1 Capital is quoted with the following: "The economy caused the situation to a great extent.  When the economy rectifies itself, the bank will see a great improvement in its balance sheet."  He speaks of "the economy" as if it were perhaps a person who, as a chief credit officer, maybe had some say over how much risk the banking institution would take with its depositors' money.  But I suppose if Mr. Chief Credit Officer had his head in the sand when he allowed his institution to take so much risk, it makes perfect sense that he'd just wait around for "the economy to rectify itself."  Because hope is always a component of any solid risk management plan.  
Tomorrow will bring the big Kahuna of economic numbers: the employment report.  If you aren't quivering in your boots yet, you should plan on starting right about now.


Joshua said...

The payroll loss tomorrow is going to be staggering but I wonder how much of a psychological effect it would have if they just announced the unemployment rate. All other major data (CPI, GDP, etc) is based as a % number. In a labor force of more than 100mm people the loss of an extra 300k jobs shouldn't push people over the edge into the Armageddon camp. All the other data we've been seeing probably should though...

Reggie said...

I think a lot of what determines if you're in the Armageddon camp or not depends on whether or not you're part of the 1.5 million job losses in q4. Tough to care about the big picture if your best alternative is going back to business school right now.