Friday, March 27, 2009

Financial Headlines 3/27/2009

President Barack Obama is seeking support from banking executives by inviting them all to the White House for a meeting of the minds.  The invitees are household names at this point; Vikram Pandit, Jamie Dimon, Lloyd Blankfein and other notables.  Apparently, the meeting will focus on stabilizing financial markets, boosting lending to business and consumers, reducing foreclosures, imposing regulatory overhauls on the industry, and making sure that banking executives are not taking to heart anything that the nutjobs in Congress are trying to do to thwart their compensation.

Some celebration is in order, if you're a bull, after a week of strong gains for equities powered by some marginally positive economic data.  Both new home sales and existing home sales were better than expected, although they remained at depressed levels.  While existing home sales rose 5.1% for February 2009, 45% of the sales were due to foreclosure activity.  The market needs to work through the massive inventory of distressed houses before supply and demand can come back into balance.  What is important is that properties are actually changing hands furiously in places like California where there is an enormous overhang in foreclosures left over from the boom.  It means that prices in those areas have more than likely reached a bottom.  This doesn't mean we're in for another huge spike in prices, but a stabilization would be extremely positive.  What is concerning is that outside of the distressed property sales, sales of new homes and existing properties are still very weak, which indicates that prices have further to fall, particularly in locations where affordability is still a major issue.

Another positive for the market was durable goods, which posted a rise of 3.4% following months of decline.  Also, mortgage interest rates have declined to record lows due to the Fed's aggressive balance sheet expansion activities which should be a huge boost to housing affordability and should spur some potential buyers off of the sidelines.
But troubling issues remain for the market.  The Financial Times reports that GM is working on the third iteration of its viability plan.  GM had until March 31st to present the plan and will more than likely need to use the one-month grace period provided for by the bailout agreement as it seeks to renegotiate with lenders and the UAW.  

The massive $8.6 billion City Center project in Vegas is preparing for a bankruptcy filing as MGM Mirage and Dubai World appear unlikely to make a $220 million debt payment due today.  A bankruptcy filing would halt construction and add to the growing landscape of half-built projects in Las Vegas.  

John Authers, in his excellent column, points out that a massive disconnect remains between equities and credit markets, despite all of the government efforts aimed at boosting credit markets.  According to a Deutsche Bank report, the implied default rates derived from corporate bond spreads are 38% in Europe, 40% in the US, and 51% in the UK.  These levels are all worse than in the Depression.  Mr. Authers offers two explanations for the divergence between equities and credit: either the credit market is suffering from illiquidity that is distorting the prices from their fundamental values, or equity investors have been smoking crack (my interpretation, not his exact words.)  But it is impossible for both to be right.  The good news is, as I've noted before, if this really is just a liquidity problem, then Geither's toxic asset plan should work.  If not, well, equity investors are in for a world of hurt.

1 comment:

airth10 said...

I share your interest about commercial real estate deals gone awry and how things got that way. The awry-ness of City Center in Las Vegas is particularly interesting. Please keep the news coming.