Yesterday Merrill unloaded $30.6bn gross notional US super senior ABS CDOs to a Lone Star Funds affiliate for $6.7bn or 22 cents on the dollar.
This leads Mr. Mortgage to suspect that other banks with similar holdings will have to have more writedowns as well.
Alt A! Alt A!
California lead the US into the worst housing recession since the 1930s–losing $1.3 trillion, or markdowns of 30-40%, in homeowner equity since Dec 2005– but may now be the first state to find the bottom. In Stockhon, the US metro area with the highest foreclosure rate, the home sales have more than doubled in Q2 after prices fell by 37%. After 30 months of straight declines, sales rose the last 3 months.
Properties seized will eventually sell at a discount ~30% to 33% with about 1 million U.S. homes in some stage of foreclosure by the end of the year.
Bloomberg – The housing bill signed by President George W. Bush yesterday is intended to stem foreclosures and includes a program backed by the Federal Housing Administration to insure as much as $300 billion in refinanced mortgages, including many subprime loans.
Via The Big Picture
Initial Jobless Claims: 448k–the worst since April 2003.
Q2 GDP: 1.9%–below the consensus of 2.3%
Q4 GDP Revisions: Revised from +0.6 to -0.2%–the first negative quarter since Q3 2001.
Consumer spending: Despite $100bn in rebate checks, consumer spending was only up .56%
Inflation: PCE rose at 4.2%
Source:
http://bigpicture.typepad.com/comments/2008/07/q4-gdp–02-unem.html
Economist Noah Rosenblatt notes that the natural evolution of the credit cycle assumes:
1) The subprime crisis will soon spread to near prime and prime.
2) Residential will spread to commercial
3) The credit cycle will come in waves
Looking at MARKIT’s CMBX indices shows that investor sentiment on the commercial sector and CMBs is quickly deteriorating–they have widened dramatically in the past 6 weeks to about 170 basis points.
**Note this is why Lehman’s health is being questioned mainly because of the Archstone-Smith buyout for $22.2bn.
This is the same reason why Markit’s ABX index experienced hardship about a year ago. Barry Ritholtz at The Big Picture had a great post titled, “WTF is going on in the ABX markets.”
Three rules to understand:
1) If you don’t understand the investment, don’t buy it.
2) Someone who tries to make a quick buck ends up losing more often than not.
3) Resist stock tips from your buddies.
It appears that T. Boone Pickens forgot a few of these rules and lost between $10 and $80 million dollars in the three months he held onto Yahoo stock. He admits on a CNBC interview that he wasn’t familiar with the details of the proxy battle lead by Carl Icahn and was simply following his fellow billionaire’s lead.
David Gaffen from WSJ reminds us, “Caveat emptor (Buyer beware).”
Steve Hochberg, chief market analyst for Elliot Wave International, said Merrill Lynch’s recent wave of write downs is another sign we’re only halfway through a bear market.
“Bottoms are created when you have the greatest amount of pessimism. It’s a little perverse, but I think people need to get scared [...] I think the VIX can get even above that in this decline, somewhere north of 40, maybe north of 50 would do it, at least on an intermediate basis.”
But the best measure of market valuation may stem from dividends, because companies simply can’t pay them if they don’t have the cash, he said. On the top day in 1929, dividend yield stood at 3 percent, and the market fell 80 percent. It is currently at less than 3 percent.
Source
http://www.cnbc.com/id/25902140
In an interview with Maria Bartiromo, Ron Paul is asked, ”What is the most important change you would make [as President]?”
He says, “If the Fed doesn’t create money out of thin air—and they do it mostly to accommodate the deficits—that would restore the soundness of the dollar and give us our purchasing power back [...]You know this idea that we can create a secret bank and they manage things and rarely tell us—or Congress or the Executive Branch—what they’re really doing, there’s a problem there. I can’t even go to a monetary policy board meeting of the Federal Reserve, and I’m on the Banking Committee of the U.S. Congress. I want open government, and certainly the Fed ought to be open. But it’s an institution that really shouldn’t exist. [Its financing] allows Big Government to get bigger without being responsible. And that’s why we have runaway spending for both warfare and welfare.
Ron Paul goes on to talk about Austrian economics and cites Ludwig von Mises, A. Hayek, and Hans Sennholz. Learn more here.
As President Bush–our only MBA president from Harvard Business School, no less–was quoted as saying, “There’s no question about it, Wall Street got drunk, that’s one of the reasons I asked you to turn off the TV cameras. It got drunk and now it’s got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments.”
Former Fed Chairman Martin once said the job of his office is to “take away the punchbowl just as the party gets going.” Unfortunately, the Greenspan and Bush administration did everything they could to keep the punchbowl full, refusing to regulate “fancy financial instruments” or restraining excessive leverage leading to issues like Freddie and Fannie.
From The Dallas Morning News:
T. Boone Pickens, a billionaire oil entrepreneur, is blazing an independent path as he pushes leaders to adopt his plan to wean the U.S. off foreign oil. While lawmakers from both parties quote him liberally, Mr. Pickens has criticized both parties for promoting measures that he thinks are insufficient. Instead, this is his proposal:
According to Terence Corcoran, the culprits aren’t short sellers, bankers, or senators but rather our quasi backdoor socialism. He is of course referring to the hybrid nature of Fannie Mae and Freddie Mac where the Fed has moved to protect these institutions while the SEC bans short-sellers to *ahem* protect against predatory speculators.
The crazy thing is that this still didn’t work–shares fell another 25% and are currently trading at $15 (Fannie Mae) and $10.80 (Freddie Mac).
Barry did an interesting piece summarizing who’s making money in these markets. John Paulson gained $15 billion last year and is up as much as 20% in his funds through June 30 through continued bets on financial companies.
Philip Falcone saw gains of 120% in 2007, and 42% through June from various commodity-related investments.
Additionally, Bloomberg reports that investors worldwide are betting more than 1 trillion on a stock market collapse in prices.
Of the $1.4 trillion of equities worldwide, almost all of that are short sellers.
The interesting (and slightly sad) part is that brokers and investment banks are expected to reap $11bn this year from lending shares, mostly shorts, including those being targeted. As the markets thin the weaker banks, there should be greater market consolidation
Sources:
http://bigpicture.typepad.com/comments/2008/07/those-damn-shor.html
http://www.ft.com/cms/s/0/8919240e-543e-11dd-aa78-000077b07658.html?nclick_check=1
Bloomberg - Bill Ackman is once again taking aim, this time at Financial Security Assurance Holdings. He is buying CDS on the insurance company’s debt. Financial Security owns 64% of all municipal bonds sold in the US during the first quarter.
Currently Financial Security and Assured Guaranty Ltf are the only bond insurers to keep a top rating and stable Fitch outlook but Assured fell 58% in NY trading on Monday and is currently trading at $10.99 after Moody said it might downgrade the firm.
Rob Haines, a CreditSights analyst said, “Potentially all the legacy companies are gone now [...] it has huge implications in the municipal bond market and for banks that may have to take another round of writedowns.”
“There’s not likely to be a man left standing [...] This thing is over already, the market just doesn’t know it yet,” says Ackman. Ackman, bet against MBIA and Ambac before their shares tumbled 90% during the past year with his hedge fund, Perishing Square Capital Management.
To contact the reporters on this story:
Christine Richard in New York at +1-212-617-4929 or
crichard5@bloomberg.net;
Sources
Assured Guaranty Plunges, Bond Risk Soars on Review (Update2)
Ackman Foresaw MBIA Drop, Is Short Financial Security (Update3)
MarketWatch – With the recent fear of bank failures, it would only make sense that an enterprising analyst would write a report on which financial institutions were next. Ladenburg analyst, Dick Bove, answer to that question was his report “Who Is Next,” which named BankAtlantic Bancorp (BBX).
Bove suggested two ways to assess the probability:
1) ratio of nonperforming assets against outstanding loans
2) ratio of nonperforming assets against reserves plus common equity.
This meant ranking BBX 10th and 12th place with 4.4% and 38.4%. On the other hand, IndyMac was ranked 4th and 1st, with ratios of 10.51% and 146.2%.
The problem stems from the fact that Bove took data on bank and thrift holding companies vs the underlying subsidiaries.
BankAtlantic is now suing Bove for defamation and negligence after his opinion knocked BBX down by 24%. BBX has lost more than 70% over the past year, closed Monday up 21 cents at $1.89. It is important to note Bove’s report states, “As always while the numbers come from sources believed to be reliable, we do not guarantee their accuracy.”
Ladenburg Thalmann’s spokesman Jonathan Doorley has also stated, “We will defend ourselves vigorously against this meritless lawsuit.”
Trader Mark notes that countries in the Persian Gulf are selling their oil while using coal for their own energy needs for two reasons:
1) Save money by using cheap and domestically available coal
2) Make money by selling crude at a ridiculously high price
Countries can now use Australian coal to produce a megawatt-hour of electricity for $17.40, versus natural gas for $41.34, and oil for $79.50.
Rocketing oil prices are pushing countries around the world to invest in coal-fired power plants. The move is being seen in Abu Dhabi (the largest of the 7 USA emirates) which just announced its switchwhile Dubai (the second largest) is building four plants with a total output of 4,000 mega-watts as a first phase investment. Russia has announced its plans to build 30+ coal-fired plants by 2011 and China is connecting a new plant to its electricity grid every 10 days.
The heart-breaking element of this developing trend is that the coal-to-liquid process consumes coal twice as fast with twice the amount of CO2 emissions as a conventional power plant.
Additionally, the US still refuses to sign this treaty while China continues to pollute while its citizens choke from the ever-present smog. Countries such as those in the oil-rich Gulf are classified as developing countries meaning they are under no obligation via the Kyoto Protocol to reduce CO2 emissions. Even though Germany is currently operating a 40-megawatt solar power plant, it is still a long way from 12,000 megawatts.
There are those who are committed to change, expect to see postings on Pickens’ ambitious but somewhat shaky plans shortly…
Bloomberg – The U.S. index futures retreated after Google, Merrill, and Microsoft all missed analysts’ profit estimates and slumped 6%+, indicating the market’s rally may be short-lived. This comes after crude-oil futures for August delivery fell $6.24, or 4.5%, to $132.50 a barrel on the New York Mercantile Exchange.
Barry Ritholtz on The Big Picture writes of cognitive dissonance in the public sphere and the absurd combination of financial negligence and incompetence. His dose of medicine?
Either we regulate the Banks, or leave it to the vagaries of the free markets to punish those who trade with, or place their assets in the wrong institutions. But for God’s sake, do not give us the worst of both worlds — do not allow banks the freedom to make horrific but preventable mistakes (i.e., only lending money to those who can pay it back), but then expect the taxpayers to foot the trillion dollar bill.
Holman Jenkin, Jr writes with the WSJ,
“With Fannie and Freddie on the ropes politically, let’s put them on a path to privatization and liquidation [...] The Federal Reserve “monetizing” all kinds of bad public and private debt, from mortgages to student loans to the unfunded liabilities of Social Security and Medicare [...] is not a policy for financial stability—but for finally prostituting the dollar to the massive liabilities of the federal government.
From the Telegraph – Ambrose Evans-Pritchard warns that the US treasury has limited time before foreign countries pull their money in light of the Fannie Mae and Freddic Mac debacle.
We depend on Asian, Russian, and Middle Eastern investors to fund our $700bn account deficit–much larger than Japan when it collapsed in the early 1990s. Until Japan, we won’t be able to cut interest rates to zero.
The FOMC on June 25 left the main interest rate at 2%, down 3.25% since September.
The US has a few days to put real money behind its rescue plan before we face a dangerous crisis according to Brian Bethune at Global Insight.
China and Russie could easily bring the US to its knees by precipitating a run on the dollar. While they would have little to gain by initiating a fire-sale, they are likley to accumulate debt at a slower rate. Additionally, countries such as Russia are likely to use their $530bn reserves as an implicit bargaining chip in what Evas-Pritchard called, “high-stakes diplomacy [...] perhaps to discourage the US from extending Nato membership to the Ukraine and Georgia.”
Bill Ackman, managing partner of the $2.4bn Pershing Square fund (and passionate critic of bond insurer MBIA), is arguing that the US government should ditch any plans to buy equity in the GSEs, and instead opt for a complete shareholder wipeout.
He told Bloomberg, “The good news is that Fannie Mae has all the capital that it needs [...] It just has the capital in the wrong form with too much debt and not enough equity.”
Ackman’s plan would allow for Fanie Mae to raise $86bn in capital by giving investors $750bn of senior unsecured notes 90 cents on the dollar in debt of a new company, with the balance in equity.
The failed bank list updated by the FDIC, posted courtesy of Calculated Risk. It includes all banks since October 1, 2000. Check back here to see it updated!
PS. Maybe we should have a Saved by Bernanke List with the ubiquitous “too big to fail” exemption.
PPS. IndyMac was not on the troubled bank list earlier this year.
The SEC is expected to unleash the Financial Industry Regulatory Authority (Finra) to look into whether brokerage houses are adequately policing rumors to manipulate stock prices.
This comes, of course after the Bear Stearns collapse and the tumble Lehman, Fannie Mae, and Freddie Mac took last week.
US regulators from the Finra and NYSE are also tracking down traders who may have sought to profit from the credit crisis by stoking rumor mills.
The problem, as Macro Man points out, is that this will likly be a one-way street with suggestions for example that “PIMCO and SAC have pulled Lehman’s (LEH) line fac[ing] reprisals, but anyone suggesting that Warren Buffett is going to buy Lehman for $100 per share will remain unscathed. [...] If you use inappropriate language about a bank, they’ll do you. If you sell the wrong bank short, they’ll do you. If you wonder aloud on possible forthcoming bad news about a bank, they’ll do you. Perhaps sellside analysts should just cut to the chase and rate every financial out there with a “Doubleplusgood” rating. Who knew that MiFID stood for the “Ministry of Financial Information Dissemination”?”
The net result? There are a number of banks reporting in the next week but reports may be filtered through Finra and NYSE in the name of financial stability. I guess this is a compromise but can anyone come up with better metrics for rumor mongering?
..if this image was actually real, which it isn’t!
Instead, we have a brilliantly photoshopped image, by cowicide, mocking an image used by the LA Times, FT, BBC News, NY Times, Yahoo, and many other major news websites after Iran’s provocative missile tests.
Unfortunately, it turns out that the image had been doctored to add another missile. US Intelligence, as of Friday, were still trying to figure out how many were fired.
Bloomberg – US stocks tumbled again as oil jumped $5 and financial stocks fell on growing concern about the health of Fannie Mae and Freddie Mac.
I guess senior Bush officials realized that praying for good luck doesn’t carry much weight in this macro environment. Hot off the press, the New York Times is reporting that the government will place the two companies under a “conservatorship” where,
…the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers. [...] the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.
The officials involved again emphasized that “no action by the administration was imminent” and 80%+ loss of market share over 12 months was not a sign of a “crisis situation,” this despite the fact that Freddie is technically insolvent under fair value accounting rules right now.
Additionally, Fannie Mae issued a statement saying, “As our regulator has stated, and has reiterated in public statements this week, we are adequately capitalized.”
The Wall Street Journal cites sources,
“the government doesn’t expect the entities to fail and no rescue plan is imminent.”
Enter the brilliant Rex Nutting, MarketWatch reporter, who gives us a list of other things the Bush administration didn’t expect:
WSJ – It was once thought that casinos were recession-proof but as economy continues its downturn, many gambling companies, still ladened with debt, are at risk for debt default or bankruptcy as cash flow shrink.
“The casino industry is in the midst of what could be its most severe downturn ever,” says Keith Foley, who covers casinos for Moody’s. “After 9/11, everyone thought Vegas was immune to just about anything, and it is suddenly obvious and maybe kind of scary that it is not.”
So far this year, four casinos have gone bankrupt including Tropicana Entertainment and Legends Gaming. Moody’s has also downgraded 17 casinos this year, with 11 more being reviewed as possible targets.
Streetwise blog – Bank for International Settlements paper is arguing that private equity firms are soon going to struggling to refinance as $500 billion loans come due between now and 2010. This will represent a dramatic shift for the PE industry as folks are currently focused on the inability to do new deals. This comes as terms like pay-in-kind (PIK) and collaterialized loan obligations have almost vanished. This BIS report is a grim harbinger for buyout firms.
Ben Bernanke announced yesterday that the Fed may extend the Primary Dealer Credit Facility into 2009.
He also endorsed ideas to set up a federal liquidataion process for a failing invevstment bank. (ahem, Lehman).
Securities firms have cut back on their use of the programs in recent weeks. As of July 2nd, the balance of the loans outstanding is zero–the first time since the program began. (vs $37 billion the first week of operation on March 26th).
Given the earlier post on curious economic indicators, I thought it might be fun to talk about the January effect where stocks, especially small-cap stocks, have historically risen in the period starting from the last day of December to the 5th trading day of January.
This rally is generally attributed to an increase in buying, which follows the December drop in price when investors try to offset capital gains taxes, prompting a sell-off. In recent years, this effect is less pronounced because of two reasons,
1) the market has accounted for it
2) tax-sheltered retirement plans have removed much of the incentive to sell and create a tax loss.
Merrill Lynch’s David Rosenberg points out that even though consumer spending and income are up, most of that $600 rebate check went into lotteries (+.9%) and casion gambling (+3%) vs a longer term commitment to the economy –in funiture, cards, appliances, or clothing.
David also notes that his favorite indicator for travel plans are luggage sales which fell .4% while after-tax income surged 5.3%. (Graph is thoughtfully provided by The Big Picture’s guru Barry Ritholtz.) His diagnosis? We are likely to see consumer spending depressed into Q3 and Q4 of 2008.
The Yuan is down sharply today vs a rally in the US dollar. It has been trading near the central-bank-set midpoint of 6.8567. Investors continue to wonder about China’s forex policy in light of Premier Wen Jiabao’s comments on “sound and fast development.” This would suggest a policy shift towards sustaining growth from inflation-fighting because of the risk of a slower global economy.
At the same time, China is mounting efforts against currency speculators and may be considering a pause in yuan-appreciation or even a temporary pull-back by the yuan to hurt such positions.
One-year offshore dollar/yuan non-deliverable forwards rose to 6.5140 from Friday’s 6.5060. This would imply a 5.26% appreciation over the next 12 months.
Le Café Américain is reporting on a confidential report from Bridgewater Associate, the 2nd largest hedge fund in the world: the US fallout will reach $1.6 trillion for financial institutions. (Compared to the $400 billion currently reported.) “Bridgewater are on the pessimistic side,” says George Magnus, Senior Economic Adviser at UBS in London, “but they have been absolutely right.”
Jean-Claude Trichet’s rate increase to 4.25% today should help hold the fastest inflation in 16 years under 2%. The euro slumped against the dollar and Europeans government bonds rose after his remarks.
The euro dropped 2 cents to $1.5703 from an all-time high of $1.601 on April 22.
Meanwhile, the Fed is keeping its key rate at 2%.
