S&P Sees Slow, Tough Road to Economic Recovery

Standard & Poor’s has published a summary of a recent roundtable of its top analysts that provides some insight into the ratings agency’s thinking on the economic outlook and credit markets. The group gave their views on the impact of government stimulus in the U.S. and globally, the implications of the resulting shift in spending from individuals and companies to governments, the continuing ramifications of the recession and other shocks to the financial system, prospects for the various sectors that Standard & Poor’s rates, and lessons learned from the housing bubble and its aftermath.

The participants were Standard & Poor’s Chief Economist David Wyss, Standard & Poor’s Ratings Services Executive Managing Director David Jacob of Global Structured Finance Ratings, and Managing Directors John Bilardello of Corporate Ratings, John Chambers of Sovereign Ratings, Jayan Dhru of Financial Institutions Ratings, and William Montrone of U.S. Public Finance Ratings.

Some key points:

• Peak to trough in taking our estimate of the second quarter, we’re looking at a 21% drop in household net worth since the end of 2007. That’s the result of the 57% drop in the stock markets combined with a 32% decline in home prices.
• … as we look forward into 2010, there’s a large amount of debt coming to maturity that will start to spike in 2010 through 2014. That’s going to weigh very heavily on corporate credit quality and the ability to refinance that debt, starting now and carrying through the next four or five years.(Bilardello)

For CMBS, the credit deterioration is just beginning and we believe the outlook is negative.

• Commercial real estate lags the overall economy, so problems with CMBS have really just begun. Refinancing needs are huge and will exacerbate the credit issues if banks don’t start lending again. Downgrades will far exceed upgrades for the foreseeable future. (Jacob)

• The outlook for RMBS is slightly less negative. Most of the subprime issues are behind us from a ratings perspective. However, we still have a lot of work to do on Alt-A and prime because the credit picture in those segments has continued to deteriorate. (Jacob)
• We’re seeing some companies take a relook at their capital structure with an eye toward deleveraging, if that’s possible. Some companies who are on the fence of speculative grade and investment grade, they’re looking to either stay investment grade or get back to investment grade, so we’re seeing a bit of that. But with that said, corporate executives have short memories. (Bilardello)

Comments

[Mad Hedge F...:]

Tough it is. Ouch! Even construction and government jobs, the beneficiaries of so much Federal largess, are still falling. Only employment in education and health care is still rising. This comes on top of yesterday’s disastrous figures showing sales at Chrysler fell 42%, Toyota (TM) 34.6%, General Motors (GMGMQ) 33.6%, and Honda (HMC) 29.5%. At least this will put that annoying “green shoots” crowd out to pasture. The Obama crowd has to be sweating bullets now, having fired their best shot at the enemy, with no apparent impact. Here comes the “L”. Please see my “Sell in May and Go Away” report at Ouch! The non-farm payroll came in at minus 467,000. What a spanking! The monthly figure is 100,000 worse than the expectations of most economists, and took the unemployment rate up to 9.5%. There are now 14.5 million unemployed, an all time high, 20 million underemployed, and who knows how many more who have taken pay cuts, unpaid vacations, and furloughs. Commodities got slammed across the board, stocks got trashed, and for a minute I thought they were going to run out of red arrows. Traders shorting the long bond got stopped out of their positions yet again. Looking at the data, it is clear that this is the worst case scenario. Even construction and government jobs, the beneficiaries of so much Federal largess, are still falling. Only employment in education and health care is still rising. This comes on top of yesterday’s disastrous figures showing sales at Chrysler fell 42%, Toyota (TM) 34.6%, General Motors (GMGMQ) 33.6%, and Honda (HMC) 29.5%. At least this will put that annoying “green shoots” crowd out to pasture. The Obama crowd has to be sweating bullets now, having fired their best shot at the enemy, with no apparent impact. Here comes the “L”. Please see my “Sell in May and Go Away” report at www.madhedgefundtrader.... .

Jul 02 12:21 PM

[conceptwizard:]

Soooooo....... Not enough money to lend, credit ratings going down, more bankruptcies resulting in more layoffs. The strong survive and the rest become part of the history landscape.
A vicious circle, an irreversible vicious circle....

Jul 02 01:24 PM