Tuesday, March 17, 2009

Financial Headlines 3/17/2009

In a rare bit of good news, housing starts unexpectedly rose in February from a record low, on a rebound in condos and apartments.  Work began on 583,000 homes, a 22% increase from January.  Building permits, however, rose a mere 3% to a 547,000 annual pace.  The increase in housing starts was led by an 89% surge in the Northeast.  I'm not sure what they're so excited about in the Northeast to prompt the surge, but I'll take it as good news that the surge wasn't in Florida.

Credit card defaults rose to a 20-year high.  Calculated Risk highlighted some of the jarring increases in charge-off rates from major issuers:  AmEx rose from 8.3% in January to 8.7% in February.  Citi's default rate soared to 9.33% from 6.95%.  Chase rose from 5.94% to 6.35% and Capital One rose from 7.82% to 8.06%.  The rate of change of these numbers from month to month seems astonishing to me.  Calculated Risk wonders what indicative loss rates the government will be using for various asset classes in its stress tests on banks.  Given how high these rates already are, we may have already reached extreme levels, and the government might have to revise higher its worst case scenario.

The focus of the markets has now shifted from whether our largest banks will survive (the government has indicated that they will, no matter what) to how bad this recession/depression is going to get.  Those that believe in the second-half recovery theory, because all of the crazy monetary and fiscal stimulus is eventually bound to work, can make a case that stocks are cheap.  Those who believe that it's impossible for the economy to recover so quickly from the bursting of such a huge credit bubble can make an argument that even if the government is set to continue to pump money into our banks, it will wind up diluting shareholders so much that the equity will become worthless.  Zero Hedge discusses the idea of "creeping equitization", where the government doesn't inject new capital but just continues to move down the capital structure, forcing conversion of preferred shares (i.e. Citi), followed by sub-debt, followed by senior debt, etc, into common shares.  Sort of a lose/lose for equity holders in either scenario.
Economic numbers matter more than ever, as investors attempt to come up with some sort of reasonable estimates for the length of the recession, while accounting for all of the various attempts by the government to speed through the downturn.  Continued volatility is the only certainty.

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