My Blog

Construction spending falls 0.6%

According to the Commerce Department, construction spending in the U.S. fell for a third straight month by 0.6% to $884.13 billion in January; construction spending dropped 1.2% in December. Nonresidential buildings in the private sector dropped 0.9% in January, while state and local government construction dropped 0.7%. Federal construction spending rose 1.9% to a high of $30.68 billion in January, increasing for the fifth straight month. Spending on private home buildings rose 1.3%. While housing starts rose 2.8% in January from December, construction permits, an indicator of future projects, dropped 4.9%. New home construction which rebounded strongly in the third quarter of 2009 seems to have lost some momentum. The economy was pushed into its worst slump since 1930s on account of the housing collapse. “We haven’t really seen much improvement in housing,” said Michael Englund, chief economist at Action Economics. “Residential construction is still weak. On the non-residential side, builders are hesitant to go along on new projects and banks are reluctant to provide the capital.”

Will Simon’s bid for General Growth attract antitrust?

Simon Property Group, a large owner of malls presented last month a $10 billion offer to buy General Growth Properties, another mall operator. Simon has offered to pay $7 billion towards General Growth’s unsecured debt. In addition, Simon would pay $6 per share to General Growth's shareholders and spin off General Growth's residential-development division, which Simon values at $3 per share. The deal, if it goes through, would create a single entity which would control about 520 malls in the U.S. While analysts wonder if the bid would invite antitrust concerns, David Simon, the Chief Executive Officer of Simon, said such concerns are unwarranted. "No way. Not even close," said Simon. "Retail real estate is so diverse. There are so many options for retailers. We're competing with the Internet. You have Wal-Mart [Stores Inc.], big-box retailers, department stores. I just don't see it being a big issue. But there's an education process I think the industry is going to have to go through." General Growth is not interested in accepting Simon’s bid and has countered Simon’s bid with a plan to receive funding from Brookfield Asset Management Inc., a Canadian property investor.

HARP gets extension for 12 months

The Obama administration introduced the Home Affordable Refinance Program (HARP) last year to help about 4 to 5 million borrowers who have little or no equity in their homes. The program, administered by Fannie Mae and Freddie Mac, refinanced 190,180 mortgages in 2009 with loan-to-value between 80% and 125%. The program which was set to expire June this year has been extended by 12 months. Edward DeMarco, acting director of the Federal Housing Finance Agency, said the program has been extended to June 2011 in order to "support and promote market stability and to encourage lenders and other mortgage market participants to fully adopt the HARP program, including the implementation of the October 2009 expansion of loan-to-value ratios to 125%." Analysts have been critical of the program and say it has had a limited impact so far. "The overall volume last year was an embarrassingly small amount. I don't think it will make a big difference" to have the program extended, said Thomas Lawler, a housing consultant.

Bankruptcies drop in the U.S.

BankruptcyData.com says only 5 public companies filed for Chapter 11 or Chapter 7 bankruptcy protection in February, compared to 19 in the same period in 2009. In January, 12 public companies filed for bankruptcy while 11 public companies went under in December. Bankruptcies of large companies -- with more than $1 billion in assets -- have slowed down. In 2009 about 25% of the companies that filed for bankruptcy had assets over $1 billion while so far this year only 19% percent of the total 16 bankruptcy filings have had more than $1 billion in assets. The improved economic situation and buoyancy in capital markets are helping companies stay afloat. Analysts however warn that the scenario is not entirely rosy and more bankruptcies can be expected. "Last year was like a tsunami, but this next phase will be more like a rising tide; consistent and steady," said William Snyder, a managing partner with CRG Partners. Analysts feel capital restructuring can help companies only to a limited extent. In the long run, what really matters is operational efficiency. Alan Cohen, chairman of Abacus Advisors, a turnaround and restructuring firm, said: "You can correct a balance sheet by manipulating debt into equity, or reducing debt, but unless the entity focuses on improving operations, they're going to have a tough time."

Number of bank failures this year: 22 and counting

Last week, regulators closed 2 banks, bringing the number of bank failures to 22 so far this year. The banks which were shut down are Carson River Community Bank, based in Nevada, with $51.1 million in assets and $50 million in deposits as of Dec. 31 and Rainier Pacific Bank with $717.8 million in assets and $446.2 million in deposits as of Dec. 31. The Federal Deposit Insurance Corporation (FDIC), which insures up to $250,000 per account at member institutions, will take a hit of over $100 million on account of the 2 failures. FDIC says the number of troubled banks jumped to 702 in the fourth quarter from 552 in the earlier quarter. Nearly one in every three banks reported a loss in the latest quarter. Amid recession and a rise in delinquent loans, the pace of bank failures has been rising, from 25 in 2008, to 140 in 2009, and to 22 in just the first 2 months this year. Banks are likely to incur as much as $300 billion in losses on Commercial property loans in the near-term, according to a recent report by the Congressional Oversight Panel, the watchdog that monitors financial bailout. With the economy not showing any signs of sustained recovery, the FDIC’s insurance fund is expected to take a hit of over $100 billion in the next four years.