Imminent and severe market correction

[MrBurns]

From Crikey -

The next big problem for US banks
by Glenn Dyer

Judging by their latest results, the next big problem for major US banks appears to be their interests in the commercial property sector: all $US6.7 trillion of it. This is while their problems with home mortgages, foreclosures and bad corporate loans show no sign of improving.

Some of America’s major banks, including Morgan Stanley, Well Fargo, Key Corp, Bank of New York Mellon, Regions Bank and US Bancorp have sent unwanted messages to American investors, markets and regulators that the commercial property sector is tanking quickly.

Money centre giants Morgan Stanley (which lost $US159 million in the second quarter overall) and Well Fargo (a $US3.17 billion profit) confirmed the mounting pressures on the US commercial property market when they reported large losses and surging bad loans in their second quarter reports.

US banks have already lost tens of billions of dollars in home mortgages and corporate loans (and been brought to their knees and saved by the US Government). Now poor quarterly figures for two of the largest lenders and investors in office, retail and industrial property across the US suggest that commercial real estate will be the next front in the financial crisis after the collapse of the housing market. And results from other banks support the notion of a commercial property implosion.

Shopping centres, office blocks and commercial industrial property are selling for huge discounts. General Growth, American’s second largest shopping centre operator is in bankruptcy and the John Hancock Building in Boston was earlier this year sold in a bankruptcy auction for $US660 million, half its purchase price three years ago.

Late last week, in a move little noticed by the markets, Macquarie CountryWide trust sold 75%% of its US holding of 86 retail properties for $US1.3 billion, or around 24% less than it had paid for them in 2005. Its exposure to the US has been cut from 70% to around 25% of its assets.

In recent events:

•Morgan Stanley reported a $US700 million cut on its $US17 billion commercial property portfolio in the second quarter.
•Well Fargo saw its non-performing loans in commercial real estate soar 69%, from $US4.5 bullion to $US7.6 billion in the second quarter.
•Regions Bank, a big regional institution based in the Alabama, saw a $US1.7 billion jump in new problem loans and a $US977 million, or 60% jump in non-performing loans in the second quarter.
•Keycorp reported rising commercial real estate loan losses: it set aside 31% more in provisions for bad loans.
•US Bancorp, based in Minneapolis, said profit fell 76% to $US221 million and its set aside and charge-off for bad loans more than doubled in the quarter.
•SunTrust, based in Atlanta, had a second quarter loss of $US164.4 million, compared with a year-earlier profit of $US530 million and non- performing loans were $US5.5 billion of loans, or a worrying 4.48% of all loans.
Earlier this month the Federal Reserve’s Associate Director of Banking Supervision and Regulation Jon Greenlee said, “…at the end of the first quarter [of 2009], about seven percent of commercial real estate loans on banks’ books were considered delinquent. This was almost double from the level a year earlier.”

Greenlee said there is about $US3.5 trillion of outstanding debt associated with commercial real estate, and banks had about $US1.8 trillion of that in their loan books. That means around $US126 billion of delinquent commercial mortgages on the banks’ books, so far. He said an additional $US900 billion represented collateral for securitised home loans through what’s called Collaterised Mortgage Backed Securities.

“The pace of property sales has slowed dramatically since peaking in 2007, from quarterly sales of roughly $195 billion to about $20 billion in the first quarter of 2009,” he said.

And on Tuesday, the softening commercial property market was a big focus of the questioning of Fed Chairman, Ben Bernanke in his Capitol Hill appearance.

Bernanke warned that a continued deterioration in commercial property, where prices have fallen by about 35% since the market’s peak and defaults have been rising sharply, would present a “difficult” challenge for the economy. He added that one of the main problems was that the market for securities backed by commercial mortgages had “completely shut down”, as it has for home mortgages.

 

[Real1ty]

I'm hearing US "commercial mortgage", “alt-A” and “prime” mortgages are hitting record default levels. Will it be big enough to start the next leg down?
Or is the current spin enough to maintain more sideways action?

We may also keep going higher. Many on this thread, and others, talk as if the next leg down is a guarantee.

Many have been doing so for months.

Where is this sideways action you speak of?

 

[moXJO]

We may also keep going higher. Many on this thread, and others, talk as if the next leg down is a guarantee.

Many have been doing so for months.

Where is this sideways action you speak of?

Higher on what though? The world was a different place pre crash and at some point all this new debt has to affect the economy negatively. And there is still plenty of bad news.

Drop two horizontal lines on a daily djia chart at roughly 8080 and 9180. Apart from the low (and subsequently V reversal to waterline) I would say at this time the market is still pretty indecisive. The coming weeks might change that if this rally takes a hold.

 

[Real1ty]

Higher on what though? The world was a different place pre crash and at some point all this new debt has to affect the economy negatively. And there is still plenty of bad news.

Drop two horizontal lines on a daily djia chart at roughly 8080 and 9180. Apart from the low (and subsequently V reversal to waterline) I would say at this time the market is still pretty indecisive. The coming weeks might change that if this rally takes a hold.

Higher on improving sentiment and economic statistics.

"End of the world" prices were priced in on the legs down, reality hits, prices rally based on oversold conditions and expected upcoming results ( Earnings and Economic ), results exceed expectations

That is what we are higher on.

It makes no difference if there is bad news, as long as the bad news isn't as bad as what it is expected to be. If it continues to improve on expectations, we will continue to rally.

However if it starts to not meet expectations on a regular basis, we head lower.

 

[Uncle Festivus]

Higher on improving sentiment and economic statistics.

"End of the world" prices were priced in on the legs down, reality hits, prices rally based on oversold conditions and expected upcoming results ( Earnings and Economic ), results exceed expectations

That is what we are higher on.

It makes no difference if there is bad news, as long as the bad news isn't as bad as what it is expected to be. If it continues to improve on expectations, we will continue to rally.

However if it starts to not meet expectations on a regular basis, we head lower.

Yes, that's exactly the point - a bunch of 'analysts' estimates driving the market because, on average, they low balled the earnings estimates, and now, as Gomer Pile would say, 'surprise, surprise' all can now say those familiar words 'better-than-expected'.

It still belies the fact that earnings are simply abysmal, on average down between 30-35%. So, when do they start pricing in reality of how to pay for stimulis debt and the still growing unemployed?

Check out the earnings figures, for those that actually bother to look past the fluff?

 

[Real1ty]

Yes, that's exactly the point - a bunch of 'analysts' estimates driving the market because, on average, they low balled the earnings estimates, and now, as Gomer Pile would say, 'surprise, surprise' all can now say those familiar words 'better-than-expected'.

It still belies the fact that earnings are simply abysmal, on average down between 30-35%. So, when do they start pricing in reality of how to pay for stimulis debt and the still growing unemployed?

Check out the earnings figures, for those that actually bother to look past the fluff?

I agree with that and furthermore if you look deeper into the earnings you will see that very few were achieved on increased revenue or margins but from cost cutting.

This is not healthy and does cast looming black clouds on the horizon imo but it is still early in this recovery, if that is what it is, so there is room for this to improve and some economic indicators are pointing to this happening.

Having said that, it still won't matter all that much. Many will see my views as too basic but the only things that matter on the stock market are the expectations of the majority.

Meet or beat expectations, we go up, miss, we go down.

 

[Whiskers]

I've only skimmed over the last couple of pages, so don't know if this has been mentioned... in the short to medium term the US treasury now has a sizeable portfolio of 'assets' that they can float off again when the markets recover some... to bolster their coffers a bit. It would be interesting to see some sums on what those strategic stakes are worth and could be worth at nominal market levels. If Aus can sell off a chunk of it's stake in Telstra along with tight fiscal policy and make enough to wipe out a substantial amount of debt, then what might the US do in the future.

It's quite significant to me that with the current administration working harder to build consensus and cooperation around the world on a wide range of issues as a high priority, that they will engineer a recovery of sorts, maybe for some years while they try to get their balance sheet and cash flows in better shape.

At the end of the day I think Obama will maintain the confidence of the people and better international cooperation than Bush did and lead to more optimism to trend the market up a bit for some time.

 

[Uncle Festivus]

Welcome back Whiskers, from wherever you have been

--------------

And now for something completely different - reality

Hey dude, where's my earnings????

 

[skyQuake]

Welcome back Whiskers, from wherever you have been

--------------

And now for something completely different - reality

Hey dude, where's my earnings????

Hi uncle, where does Casey Research get that data from? Personally i would take it with a grain of salt as I do not believe earnings have dropped by such a magnitude.
McDonalds selling big macs for 20c? Nope.
Exxon mobil selling oil for $5/Barrel? Nope.
Windows 7 freeware? Nope.
Wollies giving out cheap veggies? NEVER.
etc etc.

 

[Silus]

I agree analysts bump the market. People should stay closer to what's really going on, sticking to the numbers. But by looking at the numbers you can still find great stocks out there, so no reason to panic..

 

[Uncle Festivus]

Hi uncle, where does Casey Research get that data from? Personally i would take it with a grain of salt as I do not believe earnings have dropped by such a magnitude.
McDonalds selling big macs for 20c? Nope.
Exxon mobil selling oil for $5/Barrel? Nope.
Windows 7 freeware? Nope.
Wollies giving out cheap veggies? NEVER.
etc etc.

This is their explanation -

"Today's chart illustrates how earnings are expected (38% of S&P 500 companies have reported for Q2 2009) to have declined over 98% since peaking in Q3 2007, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.”

I guess the main point being 'inflation adjusted'? Actually, the prices in your examples above, if adjusted for inflation, would be a lot lower - that's the way inflation works? Fruit & veges are at least actually cheaper than last year apparently?

 

[Whiskers]

Welcome back Whiskers, from wherever you have been

Thanks Uncle... How you been going?

Well for me it's a long story, but basically I had a retinal tear and some urgent laser treatment. Since I only have one eye it was some anxious moments. But all's well now and while I was travelling back and forth to Bris for treatment I started collecting a few (second hand) things for myself and got a bit sidetracked into trading/refurbishing/recycling second hand timber furniture and tools.

I found there were a lot of fire-sale goods around Bris and the Gold Coast due to the economy. A lot of people were saying they were clearing out surplus items and trading down their premises etc. I found a unique niche picking up these generally quality items and taking them to other areas where there was good competition for them.

Had been making 50%, 100% even an odd 200% return in a few days to a couple of weeks much easier than I was in shares and forex.

I reckon the larger economy is a bit the same way. Just a matter of time until people particularly the yanks re-organise their 'households' to be more comfortable with their circumstances amidst the confidence of the Obama administration and start spending a bit again.

With the way commodity prices have moved in the last few days it may be that a growing number of buyers have cleaned out their cupboards so to speak and have been on the prowl in competition for a shrinking number of fire-sale sellers.

Btw, I'm not overly bullish on the US, but think this is the bit of a recovery they will have before they start to fade away again in terms of being world financial superpowers... that 'classic' comment of mine from some time ago.

 

[gfresh]

Worth a read.. not so much for what is said but the implications. China basically wants to slow down their economy, but will they do it correctly without crushing some of the optimism? 70% reduction of lending is a very large amount. This has some large consequences for our exporters I believe in the 2nd half of this year (that we are now in). Might take a while for the market to catch on, but it will help stifle some expectations I think.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a42KFUylZPog

China Construction Bank Corp. President Zhang Jianguo said yesterday that the nation’s second-largest bank will cut new lending by about 70 percent in the second half to avert a surge in bad debt. Construction Bank plans to extend about 200 billion yuan ($29 billion) of loans, down from 708.5 billion yuan in the preceding six months. The company’s new lending through June 30 was 42 percent more than for all of 2008.

“We noticed that some loans didn’t go into the real economy,” Zhang, 54, said in an interview at the bank’s headquarters in Beijing. “I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast, and housing sales are growing too fast.”

Latest chart shows the Chinese market forming a broadening top and then beginning a downtrend in the last 30 days. And as can be obvious looking at the chart for the last few years, it either goes pretty much straight up for months and months, or straight down.. and we may be embarking on the latter:

http://www.google.com/finance?chdnp...ddm=5543&chls=IntervalBasedLine&q=SHA:000001&

I know the Shanghai exchange is a bit of a casino, but I still think it has some merits in analysing what happens on our markets than some give it credit for. Note it both started falling (although so did the US markets), and made a bottom first, before our market (or the US market) did..

 

[CamKawa]

Who's supervising these loans in China? How does money meant for infrastructure projects end up in the stock market? Does someone just knock on the banks door and ask for some money to build a road, then take the cash and dump the money in the shock market? Whose running that joint?

 

[MACCA350]

gfresh, here's a chart of the three indexes combined on a 2 year time scale:

Link

And a 3 month time scale:

Over the last 3 months the SSE has increased 30% in comparison to 10% by both the Dow and the All Ords. I don't see that the slight pull back of the SSE over the last few days is a solid indication that we will...............then again I'm no expert.

cheers

 

[explod]

Harry Schultz newsletter

Conclusion: Stand by for a possible bank run & bank holiday on Aug 26th, after the news breaks on the 25th. (FDIC 2nd Qtr. Report)

This is in line with the HSL prediction of a US bank holiday in Aug/Sept.

If you live in the US, get 3 to 6 months household expense money out of banks now.

Could there be a bit of contagion here if there is truth in it and what impact on the markets if money freezes. --------------

 

[grace]

Could there be a bit of contagion here if there is truth in it and what impact on the markets if money freezes. --------------

explod, could you explain your post a bit more thanks.

 

[explod]

explod, could you explain your post a bit more thanks.

There is discussion around Wall Street that the money puored in by the Fed and Government is still short of that required to hold the US banking system afloat. That date is around where some predict (On thier rekoning of the figures) that money will freeze, and like Argentina (I think about 20 years ago, and the UK almost a year or so back) the banks will shut the doors.

Only a rumour mind.

 

[>Apocalypto<]

There is discussion around Wall Street that the money puored in by the Fed and Government is still short of that required to hold the US banking system afloat. That date is around where some predict (On thier rekoning of the figures) that money will freeze, and like Argentina (I think about 20 years ago, and the UK almost a year or so back) the banks will shut the doors.

Only a rumour mind.

LOL more comedy gold!!!

So you know the wall street insiders personally implod? let me guess you take the personal jet over there for lunches!

Ha HaHa

 

[MrBurns]

Could there be a bit of contagion here if there is truth in it and what impact on the markets if money freezes. --------------

He's not cheap
http://www.hsletter.com/index.html

Do you subscribe ?

Is it any good ?