defaults - What We're Reading - StockBuz2024-03-28T13:39:15Zhttp://stockbuz.ning.com/articles/feed/tag/defaultsBusiness Loan Delinquencies At 2008 Levelshttp://stockbuz.ning.com/articles/business-loan-delinquencies-at-2008-levels2016-05-22T15:38:07.000Z2016-05-22T15:38:07.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://static2.businessinsider.com/image/56a8e95a58c32397008b5943-2676-2007/104396071.jpg"><img class="align-right" src="http://static2.businessinsider.com/image/56a8e95a58c32397008b5943-2676-2007/104396071.jpg?width=450" width="450" /></a></p>
<p><span style="color: #ccffcc;"><em>Energy defaults have been heavy on my mind as their Bankruptcies are expected to <a href="http://money.cnn.com/2016/02/11/investing/oil-prices-bankruptcies-spike/index.html" target="_blank">increase greatly</a> in the second half of 2016.  I didn't even touch on farms and other exploding debt. Clearly I'm not alone in this concern.  It's not housing this time; it's much worse.  If rates rise, what will happen? Emphasis in <strong>bold</strong> mine.  Read on.</em></span></p>
<p>This could not have come at a more perfect time, with the Fed once again flip-flopping about raising rates. After appearing to wipe rate hikes off the table earlier this year, the Fed put them back on the table, perhaps as soon as June, according to the Fed minutes. A coterie of Fed heads was paraded in front of the media today and yesterday to make sure everyone got that point, pending further flip-flopping.</p>
<p>Drowned out by this hullabaloo, the Board of Governors of the Federal Reserve released its <a href="https://www.federalreserve.gov/releases/chargeoff/default.htm" target="_blank" rel="nofollow">delinquency and charge-off data</a> for all commercial banks in the first quarter – very sobering data.</p>
<p>So here a few nuggets.</p>
<p>Consumer loans and credit card loans have been hanging in there so far. Credit card delinquencies rose in the second half of 2015, but in Q1 2016, they ticked down a little. And mortgage delinquencies are low and falling. When home prices are soaring, no one defaults for long; you can sell the home and pay off your mortgage. Mortgage delinquencies rise after home prices have been falling for a while. They’re a lagging indicator.</p>
<p>But on the business side, delinquencies are spiking!</p>
<p><strong>Delinquencies of commercial and industrial loans at all banks</strong>, after hitting a low point in Q4 2014 of $11.7 billion, <strong>have begun to balloon</strong> (they’re delinquent when they’re 30 days or more past due). Initially, this was due to the oil & gas fiasco, but increasingly it’s due to <a href="http://wolfstreet.com/2016/05/05/us-commercial-bankruptcies-chapter-11-liquidations-rise-end-of-credit-cycle-april-abi/" rel="nofollow">trouble in many other sectors</a>, including retail.</p>
<p>Between Q4 2014 and Q1 2016, delinquencies spiked 137% to $27.8 billion. They’re halfway toward to the all-time peak during the Financial Crisis in Q3 2009 of $53.7 billion. And they’re higher than they’d been in Q3 2008, just as Lehman Brothers had its moment.</p>
<p>Note how, in this chart by the Board of Governors of the Fed, delinquencies of C&I loans start rising before recessions (shaded areas). I added the red marks to point out where we stand in relationship to the Lehman moment:</p>
<p><span class="KonaFilter image-container display-table"><span><span data-post-image="" class="image on-image"><img src="http://static1.businessinsider.com/image/573f3eda52bcd05b008c4302-675-404/d1.png" alt="Lehman moment" data-mce-source="Wolf Richter" /><span class="source"><span>Wolf Richter</span></span></span></span></span></p>
<p>Business loan delinquencies are a leading indicator of big economic trouble. They begin to rise at the end of the credit cycle, on loans that were made in good times by over-eager loan officers with the encouragement of the Fed. But suddenly, the weight of this debt poses a major problem for borrowers whose sales, instead of soaring as projected during good times, may be shrinking, and whose expenses may be rising, and there’s no money left to service the loan.</p>
<p>The loan officer, feeling the hot breath of regulators on his neck, and seeing the Fed fiddle with the rate button, refuses to “extend and pretend,” as the time-honored banking practice is called of kicking the can down the road in good times.</p>
<p>If delinquencies are not cured within a specified time, they’re removed from the delinquency basket and dropped into the default basket. When defaults are not cured within a specified time, the bank deems a portion or all of the loan balance uncollectible and writes it off, therefore moving it out of the default basket into the write-off basket. That’s why the delinquency basket doesn’t get very large – loans don’t stay in it very long.</p>
<p>And farmers are having trouble.</p>
<p>Slumping prices of agricultural commodities have done a job on farmers, many of whom are good-sized enterprises. Farmland is also owned by investors, including hedge funds, who’ve piled into it during the boom, powered by the meme that land prices would soar for all times because humans will always need food. Then they leased the land to growers.</p>
<p>Now there are reports that farmland, in Illinois for example, goes through auctions at prices that are 20% or even 30% below where they’d been a year ago. Land prices are adjusting to lower farm incomes, which are lower because commodity prices have plunged. (However, top farmland still fetches a good price.)</p>
<p>Now delinquencies of farmland loans and agricultural loans are sending serious warning signals. These delinquencies don’t hit the megabanks. They hit smaller specialized farm lenders.</p>
<p>Delinquencies of farmland loans jumped 37% from $1.19 billion in Q3 2015 to $1.64 billion in Q1 this year, the vast majority of it in the last quarter (chart by the Board of Governors of the Fed):</p>
<p><span class="KonaFilter image-container display-table"><span><span data-post-image="" class="image on-image"><img src="http://static2.businessinsider.com/image/573f3f0f52bcd01d7b8c402d-677-408/d2.png" alt="Fed" data-mce-source="Wolf Richter" /><span class="source"><span>Wolf Richter</span></span></span></span></span></p>
<p>Delinquencies of agricultural loans spiked 108% in just two quarters to $1.05 billion in Q1. On the way up during the financial crisis, they’d shot past that level during Q1 2009:</p>
<p><span class="KonaFilter image-container display-table"><span><span data-post-image="" class="image on-image"><img src="http://static1.businessinsider.com/image/573f3f2752bcd029008c42c8-680-417/d3.png" alt="D3" data-mce-source="Wolf Richter" /><span class="source"><span>Wolf Richter</span></span></span></span></span></p>
<p>Bad loans are made in good times — the oldest banking rule. “Good times” may not be a good economy, but one when rates are low and commercial loan officers are desperate to bring in some interest income. With a wink and a nod, they extend loans to businesses that look good for the moment. That has been the case ever since the Fed repressed interest rates during the Financial Crisis. A lot of bad loans were made during those “good times,” precisely as the Fed had encouraged them to do. And these loans are now coming home to roost.</p>
<p>One of the big indicators of the end of the “credit cycle” is the number of bankruptcies. During good times, so earlier in the credit cycle, companies borrow money. Lured by low interest rates and rosy-scenario rhetoric, they borrow even more. Then reality sets in.</p>
<p>Courtesy of <a href="http://www.businessinsider.com/business-loan-delinquencies-at-lehman-levels-2016-5" target="_blank">B/I</a></p>
</div>Default Concerns Continue To Weigh on Regional Bankshttp://stockbuz.ning.com/articles/default-concerns-continue-to-weigh-on-regional-banks2015-01-03T17:05:44.000Z2015-01-03T17:05:44.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291179?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1291179?profile=RESIZE_320x320" width="300"></a>Dick Evans, chairman and CEO of San Antonio based <a href="https://dwq4do82y8xi7.cloudfront.net/x/Xc7TgWcm/" target="_blank">Cullen Front Bank (CFR)</a> made the rounds in December chatting with <a href="http://www.cnbc.com/id/102251506#." target="_blank">CNBC</a> in an effort to reassure investors that the low price crude oil was only temporary and would not translate into a revisiting of the bloodbath of the 1980's, however their chart says that investors aren't drinking the koolaid. (chart right - click to enlarge)</p>
<p>The same investor fear can be seen in southern lender BOK Financial which operates in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona, and Kansas/Missouri. (chart below - click to enlarge)<br> <a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291245?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1291245?profile=RESIZE_320x320" width="300"></a></p>
<p>I believe that barring an OPEC cut in production or some outside supply disruption, crude will NOT recover in 2015 as explained in <a href="http://stockbuz.net/articles/no-crude-oil-recovery-in-2015" target="_self">this post.</a> Is this what these bank charts are hinting at?</p>
<p>The next question is if these banks begin to see defaults in oil and gas names, just how many dominos lie behind in the high-yield bond financial trail. As Becky Quick points out, hedging only lasts for so long so if crude oil does not recover, 2015 will definitely weigh further on Southern small, regional banks. </p>
<p>In fact the chart of <a href="https://dwq4do82y8xi7.cloudfront.net/x/Xc7TgWcm/" target="_blank">high yield bonds, HYG</a> seem to imply investors <em>do believe</em> there's more pain ahead. With these breakdowns, traders will look to fade any rally at overhead resistance and lower targets are near the 50 month and 100 month simple moving averages (for now).</p>
<p>It may be time for Steven Neil from BOK to hit the airwaves in an attempt to reassure investors but charts don't lie folks. As we've learned in the past, bankers do.</p></div>Energy Contagion - The Big Unknownhttp://stockbuz.ning.com/articles/energy-contagion-the-big-unknown2014-12-08T17:35:22.000Z2014-12-08T17:35:22.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/12/20141208_energy2_0.jpg"><img class="align-right" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/12/20141208_energy2_0.jpg?width=400" width="400" /></a>Indeed, I've read much concern over this area as oil collapsed so it does merit a warning.  From <a href="http://www.zerohedge.com/news/2014-12-08/energy-bond-risk-soars-fresh-record-high-stocks-slump-20-month-lows" target="_blank">ZeroHedge</a>:</p>
<p>The S&P 500 Energy sector stocks are down over 12% year-to-date, tumbling over 3% today to fresh 20-month lows. <strong>The spread (or risk) of high-yield energy credits surged again today, breaking above 850bps for the first time</strong>... The overall high-yield credit market is being dragged wider by this contagion as hedgers try to contain <a href="http://www.zerohedge.com/news/2014-11-30/imploding-energy-sector-responsible-third-sp-500-capex">the collapse that is possible</a>. For now, <a href="http://www.zerohedge.com/news/2014-11-30/imploding-energy-sector-responsible-third-sp-500-capex">the S&P 500 remains entirely ignorant of the fact that over a third of its CapEx was expected to come from this crushed sector</a>...</p>
<p>According to DB</p>
<blockquote>
<blockquote>
<p><strong>US private investment spending is usually ~15% of US GDP or $2.8trn now</strong>. This investment consists of $1.6trn spent annually on equipment and software, $700bn on non-residential construction and a bit over $500bn on residential. Equipment and software is 35% technology and communications, 25-30% is industrial equipment for energy, utilities and agriculture, 15% is transportation equipment, with remaining 20-25% related to other industries or intangibles. Non-residential construction is 20% oil <strong>and gas producing structures and 30% is energy related in total</strong>. We estimate global investment spending is 20% of S&P EPS or 12% from US. <strong>The Energy sector is responsible for a third of S&P 500 capex. 35% of S&P EPS from investment and commodity spend, 15-20% US</strong></p>
<p><strong> </strong><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/11/capex%20spending.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/11/capex%20spending_0.jpg" height="260" width="600" /></a></p>
</blockquote>
</blockquote>
<p>In short, while nobody knows just how many tens of billions in US economic "growth", i.e., GDP, will be eliminated now that energy companies are not only not investing in growth spending or even maintenance, being forced to shut down unprofitable drilling operations and entering spending hibernation territory, the guaranteed outcome is that US GDP is set to slide as the CapEx cliff resulting from Brent prices dropping below the $75/bbl <em>red line</em> under which shale is broadly no longer profitable will offset any GDP benefit unleashed from the "supposed" increase in consumer spending.</p>
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