Musical Chairs
Mike "Mish" Shedlock
Jun 28, 2006
I was recently asked if I saw anything whatsoever that suggested
lenders are tightening at all in the face of declining collateral
and rising debt service pressures on their customers.
The answer to that question is a resounding no. In fact the latest
data shows the opposite: credit standards are still getting easier
and businesses are still trying to expand or capture market share
regardless of the consequences down the road.
Bank Lending Survey
According to the April 2006 Senior
Loan Officer Opinion Survey on Bank Lending Practices,
- On net, 12 percent of domestic
institutions indicated that they had eased standards on business
loans to large and middle-market firms.
- About 60 percent of domestic
respondents, a notably larger net fraction than in the previous
survey, reported that they had trimmed spreads of loan rates
over their cost of funds for such firms.
- Almost 40 percent of domestic
institutions, again a larger net fraction than in the January
survey, indicated that they had reduced the costs of credit lines
over the past three months.
- About one-fifth of domestic
banks, noted that they had increased the maximum maturity of
C&I loans or credit lines that they were willing to extend
to their business borrowers.
- For C&I loans to small
firms, 7 percent of domestic respondents noted that they had
eased lending standards in the April survey.
- On balance, almost 50 percent
of respondents indicated that they had narrowed spreads of loan
rates over their cost of funds.
- About 30 percent of respondents
reported having reduced the cost of credit lines over the same
period.
- Most respondents reporting
easing of their lending standards cited more aggressive competition
as an important reason for having done so.
Perhaps lending standards have
changed given the market downdraft in equity markets in May but
I doubt it. Note that housing starts were up this month even
though inventories are skyrocketing and buyer traffic is back
at 1990 levels. "Have Funding Will Build" seems
to be the homebuilder motto of the day.
Housing Starts
Here is another angle on housing starts:
Bloomberg is reporting Copper
Rises After U.S. Housing Starts Gain More-Than-Expected.
Copper in London and Shanghai
rose after home construction rebounded in the U.S. last month,
spurring optimism for sustained demand in the world's second-
biggest user of the metal.
Housing starts rose a greater-than-expected 5 percent to an annual
rate of 1.957 million, the Commerce Department said yesterday
in Washington. The average U.S. home contains about 400 pounds
(181.4 kilograms) of copper wire and pipes, according to the
New York-based Copper Development Association.
"Prior to these numbers, there was some concern that the
U.S. property market was cooling, but the announcement showed
that is not the case," Cai Luoyi, a metals analyst at China
International Futures (Shanghai) Co., said by phone.
So there was "some concern"
about US housing but I see that one month of data removes all
that concern. By any chance is Cai Luoyi the replacement for
the rogue trader that cost China $200 million by shorting copper
futures last year?
Flashback to November 25th. The Washington Post reported [New
China Stumbles Into Old-Fashioned Trade Scandal] Losses
on Copper Futures Have Leadership Spinning?
Fast forward to today:
There are now record numbers of unsold homes on the market. There
were 565,000 new and 3.4 million existing residences for sale
in April according to the National Association of Realtors and
the Commerce Department. That is a lot of supply and home builders
keep adding to it every month at a far faster pace than sales.
Danielle DiMartino writing for the Dallas Morning News is asking
Which
builders will be left standing?
After I had mulled over the
troubling 5 percent rise in May housing starts, a brilliantly
simple explanation hit my inbox.
"Builders with no starts are 'unemployed,' " wrote
James Bandy of Dallas, "and they will never be voluntarily
unemployed."
Mr. Bandy said he recalls Texas in the mid-1980s well enough
to recognize the sequel to the high-stakes game of musical chairs.
Given that we all know how the game ends, it's hard to see why
so many builders continue to be willing participants. Yet they
play on.
In case you've missed the most massive buildup since the Cold
War, inventories of new and existing homes are at the highest
levels ever recorded. Combine existing and new construction and
you get a cool 4 million unsold units.
With this much supply, you'd think starts would be down by more
than 3.8 percent from January's 33-year high.
Wouldn't it be smarter to show a bit of restraint and shelter
what profit margins do remain? It's not as if retaining sales
volumes to keep up appearances is still a legitimate excuse.
Wall Street long ago pummeled homebuilder stocks.
In fact, the meltdown in share prices has freed homebuilders
to shift their focus back to profits. Rather than pile on more
incentives to stanch plummeting demand, those with an eye on
survival could simply cancel, or at least postpone, groundbreakings.
It's painfully apparent that, somewhere along the way, the industry
abandoned concern for its customers' long-term well-being.
Maybe builders just don't appreciate how critical a role they
play. Oversupply is but one issue when viewed in isolation
as is the risk to the labor market, as is the threat to the banking
system.
Add them together, though, and we're not talking child's play.
We're talking about a seriously brutal session of musical chairs.
One has to laugh about that
musical
chairs analogy but it goes beyond homebuilding into every
aspect of this financial economy totally dependent on ever increasing
amounts of risk. Not only are more and more players struggling
to get into the game (with no additional chairs being added)
those already in it are struggling to increase leverage.
AmeriCredit Expansion
Please consider AmeriCredit
Plans Lending Expansion.
AmeriCredit Corp., which makes
auto loans to consumers with risky or limited credit histories,
plans to make more loans through additional car dealers, to a
wider variety of consumers.
But by expanding into an economic landscape marked by concerns
about inflation, rising interest rates and tightening credit,
the company may be preparing to swim against the current.
The Fort Worth, Texas-based lender is in the early phases of
a multidimensional expansion plan to grow the company's $10.38
billion auto loan portfolio 10 percent to 15 percent annually
by moving into new geographic regions, making new kinds of loans,
offering fresh types of products and approving loans to consumers
with credit the company had previously considered too pristine.
The company is also expanding geographically and considering
direct-to-consumer loans and some other products within auto
finance, such as warranties. The idea to is to become a "full-spectrum,
one-stop shop" for auto dealers, Chief Operating Officer
Preston Miller said at the conference.
AmeriCredit executives say credit measures such as defaults and
loan write-offs are at their safest levels in years, meaning
the company can wade into deeper waters without hurting profits.
AmeriCredit executives say credit measures such as defaults and
loan write-offs are at their safest levels in years, meaning
the company can wade into deeper waters without hurting profits.
"Unless you can draw some correlation between those types
of events and what is going to happen to the consumer's job,
we really don't see that that would have a direct impact on our
portfolio," Choate said. "Our view is that they would
continue to make their car payment in order to get to their job."
"If they're getting their paycheck, they're going to use
it to pay their car bill," Brendler said. "That typically
is a very powerful motivator."
Excuse me but didn't AmeriCredit
practically go bankrupt in the last downturn?
Here is a weekly chart to consider.
The above chart suggests AmeriCredit
had a near brush with death. I seem to recall some of its competitors
actually going under. Somehow they seemed to snag the last chair
before Greenspan flooded the economy with dollars bailing out
the near dead. Yet now with a Fed merrily hiking away, jobs data
weakening, real wages falling (and more so for AmeriCredit customers
than the average) somehow AmeriCredit thinks this is the ideal
time to expand.
Perhaps AmeriCredit is emboldened by the fact they managed to
find a chair the last time the music stopped but I have my doubts
about the next game when chairs will be yanked left and right.
Let's look at one more interesting article from Danielle DiMartino.
This one is called Not
feeling at home with risk.
Three weeks ago the portfolio
manager at Pacific Investment Management Co. sold his house and
moved into an apartment with his wife. Though his wife wasn't
exactly happy with the move, his sense is "she will look
back on our sale and view it as a good one."
Curiously, Mr. Kiesel's specialty is corporate bonds, which he
says have given him a unique perspective on the U.S. housing
market.
"Rising home prices have been the key driver of U.S. economic
growth, which in turn has played a major role in the tightening
of corporate bond spreads," Mr. Kiesel said.
Many of these companies are buying back their stock, which weakens
bondholders' cash cushion on the balance sheet. "In this
environment, bondholders should be demanding covenant protection
as well as higher spreads on homebuilder bonds."
Because housing has driven the economy for so long, the slowdown
will bring, among other things, tighter lending standards, less
willingness to take risk, lower asset price appreciation outside
housing, less liquid financial markets and rising volatility.
"At that point, 'For Sale' will not just be a sign you see
in front of your neighbor's yard," Mr. Kiesel added. "Investors
may also put a 'For Sale' sign on risk assets as well."
Judging from the huge swings we've seen in emerging markets,
stocks and commodities in recent weeks, big institutional investors
have already started to shift away from risk, something that
carries deeper implications for bondholders.
Junk bond spreads are widening,
the Fed is still hiking, housing inventory is soaring, but builders
are still building, companies are still wasting cash on share
buybacks at inflated prices, and credit standards amazingly are
still headed lower. It's not readily apparent right now but I
suspect there will be a severe shortage of chairs when Bernanke's
Big Band stops the rate hike music.
Mike Shedlock / Mish
email: Mish
http://globaleconomicanalysis.blogspot.com/
321gold Inc
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