I called a lot of my friends this week that work in the fixed income markets and their stories are off the charts. To say the market is dislocated is like saying Hurricane Katrina was just a mild tropical storm. The stories of the messed up muni-market dominated the headlines, though descriptions of credit-default swaps came a close second. There is definitely huge contagion in fixed-income securities with corporate bond spreads at historical wides, high yield spreads, mortgage-backed bonds, leveraged loans…. you name it. Spreads are so off the charts that hedge funds are scrambling to launch NEW funds for March 1st that are multiples in size of previous funds. I had a call this week with a distressed fund manager that is soon to launch a $9 billion fund. $9 billion. Though I challenged this very experience manager over the fund size he was quick to quote numbers as to how much supply has been created over the past couple of years and how much of that supply is in deep trouble. For money that is in this space already it cannot find the exit fast enough, and for new money, it is the opposite. How this is all going to shake out will be mighty interesting indeed.
More and more commentators are talking about the disconnect between what the fixed income markets are telling us and the relative strength of the equity markets. The former is predicting a truly nasty, nasty, shake-out and the latter is still not sure if in fact the US is in a recession. If the monolines get restructured the equity markets will likely experience a nice pop, but I still believe that any rally is a bear market one. Splitting the monolines will help the muni-market, but it will not do much for the other asset buckets.
Fingers are starting to point toward the Commercial Real Estate Market as well. Though defaults are at record lows, the numbers I have heard thrown around as to the cap rates of recent purchases is enough to make your hair fall out. Index spreads have already gotten hammered anticipating some mighty nasty default rates.
Where is the good news you ask? Hmm… very hard to find. Very. Corporations are sitting on a lot of cash ($611BB) , and the fed can still cut rates, but other then that, ?????
Oh my gosh… how could I not mention inflation and commodity prices? We got some disturbing numbers in the US ( CPI up 4.3% yr over yr ), but did you see China’s? I still firmly believe that the US rates are understated. All you have to do is take a look at overall commodity prices, or compare your own bills year over year. I will say it again… Stagflation, and know it seems like I am not the only one saying it.
In closing, a few random facts I pulled out of the papers this week
- 8.8 MM homeowners or 10.3% are underwater according to an estimate by Moodys, economy.com ( NYT Friday)
- Thrift industry posts a record $5,2 bb Q4 loss, the largest since they started collecting records in 1984.
- Quant Funds were down 6% as a group in Jan.
- Medicare unfunded liability is $74 trillion
- Sharper Image and Lillian Vernon file for bankruptcy.
- Credit Swiss announced a surprise loss resulting from pricing errors of $2.85 bb
Have a great week.. I am off to California!
Sunday, February 24, 2008
Thursday, February 14, 2008
Cash=Auction Rate Securities ....Not Anymore.
Cash = Auction Rate Securities … not any more
There was a story in the paper today about a guy who sold his business and was sitting in about a billion dollars of “cash”, oops, I mean PARS. As he learned today, those two are not the same things, though for as long as anyone remembers they have been.
For a definition of what these securities are here is the wikipedia link
http://en.wikipedia.org/wiki/Auction_rate_security
I will say it again.. what is going on in the credit markets is completely off the charts wild.
Municipalities who have long relied on the short term markets to access capital at rates reflective of their underlying loan quality simply cannot rely on it anymore. Because investors were unwilling to buy their bonds, the auctions ‘failed’, which resulted in parties that wanted out, to be shut down. It is not really that bad, as in most cased the interest rate kicked up nicely, but if you needed that money for something, tough bananas.
As a holder of ARS you of course bought it because you thought is was a cash-like piece of paper with quick liquidity. What in fact you bought was a 30 year piece of paper. If it fails to clear the market it resets to the highest rate as outlined in the paperwork and whoever is holding the hot potato, stays holding it, until the next auction of until the issuer calls it.
Of note is that firms like Goldman Sachs, who issued the first tax exempt ARS in 1988, was unwilling to step in to take down the bonds. Not a good way to build client relationships either with the investor or the issuer. Of course they were not the only ones doing it, but still. It is clear that everyone is in the “protect your balance sheet mode”. Big Time.
Now for anyone reading who has a money market fund thinking “Oh My Gosh”, money market funds cannot buy these securities as they are effectively 30 year bonds. Money market funds have other troubles, but this is not directly one of them. Indirectly it is very disrupting, but this alone does not affect the funds liquidity.
There was a story in the paper today about a guy who sold his business and was sitting in about a billion dollars of “cash”, oops, I mean PARS. As he learned today, those two are not the same things, though for as long as anyone remembers they have been.
For a definition of what these securities are here is the wikipedia link
http://en.wikipedia.org/wiki/Auction_rate_security
I will say it again.. what is going on in the credit markets is completely off the charts wild.
Municipalities who have long relied on the short term markets to access capital at rates reflective of their underlying loan quality simply cannot rely on it anymore. Because investors were unwilling to buy their bonds, the auctions ‘failed’, which resulted in parties that wanted out, to be shut down. It is not really that bad, as in most cased the interest rate kicked up nicely, but if you needed that money for something, tough bananas.
As a holder of ARS you of course bought it because you thought is was a cash-like piece of paper with quick liquidity. What in fact you bought was a 30 year piece of paper. If it fails to clear the market it resets to the highest rate as outlined in the paperwork and whoever is holding the hot potato, stays holding it, until the next auction of until the issuer calls it.
Of note is that firms like Goldman Sachs, who issued the first tax exempt ARS in 1988, was unwilling to step in to take down the bonds. Not a good way to build client relationships either with the investor or the issuer. Of course they were not the only ones doing it, but still. It is clear that everyone is in the “protect your balance sheet mode”. Big Time.
Now for anyone reading who has a money market fund thinking “Oh My Gosh”, money market funds cannot buy these securities as they are effectively 30 year bonds. Money market funds have other troubles, but this is not directly one of them. Indirectly it is very disrupting, but this alone does not affect the funds liquidity.
Wednesday, February 13, 2008
The First Guest Post on Purse Pundit - More on the Credit Markets
I have been emailing friends asking their thoughts on the markets and below is a very thoughtful response. The writer is a great guy, a smart and experienced guy, who has worked in the bond business for over 20 years. More then a few people I have spoken to are pointing the finger at Greenspan. He talked early on about "Irrational exuberance" but did little about it! .................... enjoy the read.
"I remain in the camp that on a valuation basis many stocks are probably cheap. That said, I do think, and have since early summer, that there remains at least some chance of financial Armageddon. The press and most experts really missed the subprime/real estate debacle. The fact that CNBC, or anyone for that matter, would care what some chief economist from the national association of realtors thinks of real estate values or trends in silly. Almost everyone missed the problems on MBIA and AMBAC and these guys have analysts from everywhere following them. In the Greenspan era, when he was flooding the markets with money, banking examiners and regulators turned a blind eye to the raping and pillaging going on in anything mortgage related. When the final book is written on Greenspan, his image will be torn to shreds and we will all come to understand how disastrous his bubble causing policies were. Unfortunately Bernanke gets the short term heat. He is way over his head and if he was smart he might open up his private phone lines to people who know something about capital markets. Might I suggest he dial 1-800-GOLDMAN for some smart advice?Clearly the capital markets are frozen. The leveraged loan market remains a huge problem. Not for just bank's balance sheets, but for any new deals. Without a functioning secondary market, the new issue machine will remain dormant. The bond insurers’ situation remains our biggest short term threat. How they solve that I have no idea. Buffett taking over the muni side will help the muni market, but in-turn deprives the insurers of their best business. The business they should have never ventured from.Like I said, I think a complete meltdown is way less than likely. But it remains the threat, that should it occur will change all of our lives. Not very comforting to me is the fact that I place my hope in this event not happening largely because; well, "they" can't let it happen. We deserve it to happen for sure. Living way beyond our means, pursuing a weak dollar policy while telling the world we have a strong dollar policy, fighting a very unpopular war while creating enemies in all corners, under-educating our children in the sciences and math, etc will ultimately hasten our decline as the world's greatest nation. But in my heart of hearts I do believe that the sovereign wealth funds and all the trading partners with huge dollar reserves will somehow not let us completely fail.My hope is that we can solve some of these problems with good fiscal and monetary policies. The fact that we are in an election year should be a positive. Given the dollar and the easing, gold is probably worth owning as we inflate our problems away. Given the slowing of our economy and therefore the world's, oil should probably move lower eventually (not withstanding that bum Chavez). Your protection on private equity holdings was choosing good managers and companies in the first place. The leveraged loan market problems should push any exit strategy out on the time line for sure. But the deal guys are hugely incentivized to create profits for you. Over time the good deals will succeed."
… and that is all he has to say about that. Thanks Buddy.
"I remain in the camp that on a valuation basis many stocks are probably cheap. That said, I do think, and have since early summer, that there remains at least some chance of financial Armageddon. The press and most experts really missed the subprime/real estate debacle. The fact that CNBC, or anyone for that matter, would care what some chief economist from the national association of realtors thinks of real estate values or trends in silly. Almost everyone missed the problems on MBIA and AMBAC and these guys have analysts from everywhere following them. In the Greenspan era, when he was flooding the markets with money, banking examiners and regulators turned a blind eye to the raping and pillaging going on in anything mortgage related. When the final book is written on Greenspan, his image will be torn to shreds and we will all come to understand how disastrous his bubble causing policies were. Unfortunately Bernanke gets the short term heat. He is way over his head and if he was smart he might open up his private phone lines to people who know something about capital markets. Might I suggest he dial 1-800-GOLDMAN for some smart advice?Clearly the capital markets are frozen. The leveraged loan market remains a huge problem. Not for just bank's balance sheets, but for any new deals. Without a functioning secondary market, the new issue machine will remain dormant. The bond insurers’ situation remains our biggest short term threat. How they solve that I have no idea. Buffett taking over the muni side will help the muni market, but in-turn deprives the insurers of their best business. The business they should have never ventured from.Like I said, I think a complete meltdown is way less than likely. But it remains the threat, that should it occur will change all of our lives. Not very comforting to me is the fact that I place my hope in this event not happening largely because; well, "they" can't let it happen. We deserve it to happen for sure. Living way beyond our means, pursuing a weak dollar policy while telling the world we have a strong dollar policy, fighting a very unpopular war while creating enemies in all corners, under-educating our children in the sciences and math, etc will ultimately hasten our decline as the world's greatest nation. But in my heart of hearts I do believe that the sovereign wealth funds and all the trading partners with huge dollar reserves will somehow not let us completely fail.My hope is that we can solve some of these problems with good fiscal and monetary policies. The fact that we are in an election year should be a positive. Given the dollar and the easing, gold is probably worth owning as we inflate our problems away. Given the slowing of our economy and therefore the world's, oil should probably move lower eventually (not withstanding that bum Chavez). Your protection on private equity holdings was choosing good managers and companies in the first place. The leveraged loan market problems should push any exit strategy out on the time line for sure. But the deal guys are hugely incentivized to create profits for you. Over time the good deals will succeed."
… and that is all he has to say about that. Thanks Buddy.
A $43 Trillion Dollar Market Most People Have Never Heard Of
Another POST on the HUFF! It has certainly generated some interesting quotes. Follow the links on the piece to BILL GROSS's comments.
http://www.huffingtonpost.com/jacki-zehner/a-43-trillion-dollar-mar_b_86199.html#postComment
http://www.huffingtonpost.com/jacki-zehner/a-43-trillion-dollar-mar_b_86199.html#postComment
Sunday, February 10, 2008
We Will Be Seeing New Headlines This Week
Watch for New Front Page Headlines This Week – Leveraged Loans, Commercial Real Estate…. The Next Shoes to Drop.
A must read - “Credit Jitters Hit Leverage Loan Market” (WSJ FEB 9/10) – This is a page 5 item that is going to work it’s way to the front page shortly. The significance of Friday is that packages of loans are now being put out to bid, in size. It is not clear whether the packages for sale by Wachovia and UBS on Friday were sold, but from what I heard the indications of what it would take to sell them sent shock waves through the markets.
http://online.wsj.com/article/SB120248373871853879.html
Many have been asking what Next after Sub-Prime, and the answer it – take your pick????
- Commercial Mortgage Backed? – YES – See the headline from Friday’s WSJ “Chapter II – A Commercial Real Estate Bust” or Goldman’s recent report called “The Next SubPrime? Quantifying expected losses from CRE, Alt-A, HELOCs and Option Arms. Goldman says the size of the CMBS market is $3.3 trillion with about 33% or $1.1 trillion securitized and the balance held directly. They are calling for losses of about $183 BB with a whole lot of assumptions. I am not sure the number, but it is big.
- Credit Card Debt” – YES – Credit Card Debt reached a high of $943.5 BB in Dec. according to Fed Reserve. ( up 9.3% in last quarter) Delinquencies are still low at around 4%. ( WSJ Feb. 9) but are reportedly on the upswing.
- Other Exotic Residential Mortgage Product? – YES as mentioned in the Goldman piece.
- Auto Loans? – One would think, but I have not seen numbers.
- Leveraged Loans? – YES ( and what exactly they are is described in the article mentioned above)
- Credit Derivatives? – YES . Bill Gross’s January commentary talks in detail about the shadow banking system and the size of the credit default swap market. Hold on to your seatbelts, as he says the size is $42 trillion, which “according to the Bank for International Settlement (BIS) is more than half the size of the entire asset base of the global banking system. Size of the total derivative market you ask? “$500 trillion according to Bill.” Now a reasonable person would ask how is that possible? The simple answer is leverage combined with very creative financial engineering.
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+January+2008.htm
On the Equity side the markets had a horrible week, after a horrible January. Signs of life for equities thanks to an aggressive FED and a $168 BB spending package that seems to be moving swiftly along have quickly become overshadowed by worries around the credit markets and disappointing economic news. What is going to change this week? I think the equities market will continue to focus on the economic data which is light this week – retail sales on Wednesday and I believe Industrial Production Friday. Might well be another very volatile week.
Market Performance for the Week
DJ Indus -561 -4.40% ytd -8.16%
S & P -64.13 -4.60% ytd -9.33%
Nasdaq -108.5 -4.50% ytd -13 %
FTSE Europe -5.97%
Japan -4.8%
A must read - “Credit Jitters Hit Leverage Loan Market” (WSJ FEB 9/10) – This is a page 5 item that is going to work it’s way to the front page shortly. The significance of Friday is that packages of loans are now being put out to bid, in size. It is not clear whether the packages for sale by Wachovia and UBS on Friday were sold, but from what I heard the indications of what it would take to sell them sent shock waves through the markets.
http://online.wsj.com/article/SB120248373871853879.html
Many have been asking what Next after Sub-Prime, and the answer it – take your pick????
- Commercial Mortgage Backed? – YES – See the headline from Friday’s WSJ “Chapter II – A Commercial Real Estate Bust” or Goldman’s recent report called “The Next SubPrime? Quantifying expected losses from CRE, Alt-A, HELOCs and Option Arms. Goldman says the size of the CMBS market is $3.3 trillion with about 33% or $1.1 trillion securitized and the balance held directly. They are calling for losses of about $183 BB with a whole lot of assumptions. I am not sure the number, but it is big.
- Credit Card Debt” – YES – Credit Card Debt reached a high of $943.5 BB in Dec. according to Fed Reserve. ( up 9.3% in last quarter) Delinquencies are still low at around 4%. ( WSJ Feb. 9) but are reportedly on the upswing.
- Other Exotic Residential Mortgage Product? – YES as mentioned in the Goldman piece.
- Auto Loans? – One would think, but I have not seen numbers.
- Leveraged Loans? – YES ( and what exactly they are is described in the article mentioned above)
- Credit Derivatives? – YES . Bill Gross’s January commentary talks in detail about the shadow banking system and the size of the credit default swap market. Hold on to your seatbelts, as he says the size is $42 trillion, which “according to the Bank for International Settlement (BIS) is more than half the size of the entire asset base of the global banking system. Size of the total derivative market you ask? “$500 trillion according to Bill.” Now a reasonable person would ask how is that possible? The simple answer is leverage combined with very creative financial engineering.
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+January+2008.htm
On the Equity side the markets had a horrible week, after a horrible January. Signs of life for equities thanks to an aggressive FED and a $168 BB spending package that seems to be moving swiftly along have quickly become overshadowed by worries around the credit markets and disappointing economic news. What is going to change this week? I think the equities market will continue to focus on the economic data which is light this week – retail sales on Wednesday and I believe Industrial Production Friday. Might well be another very volatile week.
Market Performance for the Week
DJ Indus -561 -4.40% ytd -8.16%
S & P -64.13 -4.60% ytd -9.33%
Nasdaq -108.5 -4.50% ytd -13 %
FTSE Europe -5.97%
Japan -4.8%
Thursday, February 7, 2008
A Good Read On the Monolines and the Muni Market
I was working hard on a Huffington Post submission but I ran out of GAS. What is timely is this piece on the monolines that should be read if you are following what is unfolding in the credit markets. I was hoping to link it in to an overview of the credit default market but that is not going to happen tonight... enjoy the read.
http://articles.moneycentral.msn.com/Investing/SuperModels/TheBigThreatOfMuniDebt.aspx
http://articles.moneycentral.msn.com/Investing/SuperModels/TheBigThreatOfMuniDebt.aspx
Wednesday, February 6, 2008
“ A 370.03 – Point Vote Against Stocks “ – The Story Continues
The markets are certainly continuing to give our Presidential Candidates a lot of talk about! After a few days of positive price action last week, global equities once again cast their vote of no confidence. As mentioned previously the markets are reacting passionately to the latest piece of economic data, and this time it was the Institute for Supply Management’s Report telling us the service sector is in trouble. The DOW, now down 3.75% is still off it’s lows, but today’s price action continues to leave cause for worry. Behind this front-page headline was a piece on C-7 that caught my attention – “Wheat Futures Set a Record.” They go on to tell us that the March contract traded at the “highest price for any wheat contract.” ( up 41 % on the year ) Although I personally am trying to follow a gluten free diet, I think most of America eats bread, and a lot of it. Agricultural commodities in general, like precious metals, have been on fire and that is part of the reason I do not understand the reported low CPI numbers – oh ya, they usually report them ex- food and energy. I want to see the pure food and energy CPI, especially when they factor in where all the futures are trading, not just 3 months down the road, but 10 years down the road. I have read some deeply alarming statistics around the growing demand for food which is leaving me long time bullish on not only broad based commodities, but the companies that are involved in global food production. There is a longer story there which will most certainly follow.
So what can we expect for the rest of the week? Month? I think we will continue to experience a lot of volatility in this bear market. I remain firm in my view that the US is in a recession, the party of US consumer spending is over, and the rest of the world will feel the pain. Besides providing direct liquidity in to the banking system via their window, the fed has no juice left in the needle to provide temporary boosters to the market by means of rate cuts until mid march. It is too early to expect a lot of good news to hit the markets that will fundamentally change this markets direction.
So what can we expect for the rest of the week? Month? I think we will continue to experience a lot of volatility in this bear market. I remain firm in my view that the US is in a recession, the party of US consumer spending is over, and the rest of the world will feel the pain. Besides providing direct liquidity in to the banking system via their window, the fed has no juice left in the needle to provide temporary boosters to the market by means of rate cuts until mid march. It is too early to expect a lot of good news to hit the markets that will fundamentally change this markets direction.
Sunday, February 3, 2008
What a Difference a Week Makes
This week was certainly a robust one for the majority of equity markets around the world. China, Hong Kong and Singapore were amongst the handful that suffered another leg down, with China now down almost 18% for 2008. The US markets in contrast posted some of the healthiest gains, with the S & P up almost 5%. The FED in a much anticipated move on Wednesday cut another 50 bps, giving a total 125 bp boost to the economy. Further they announced they would make $60 billion available via auction to the banks, just in case there cash drawers are running a little low. The real question is whether it is sustainable, or is to be held suspect as a bear market rally? In this week’s BARRONS Alan Abelson suggests the latter, stating that “Folks are manifestly desperate for any news that might be read as favorable….” He goes on to say that “What we are seeing is a typical bear market rally, predictably paced by the very stocks – homebuilders, financials and the like – that spearheaded the big plunge.” There is likely some great value to be found in bottoms up stock picking, but I still would not trust the overall market.
The latest job report was far from favorable, noting that non farm payroll dropped by 17,000 in January, the first drop in more then 4 years. ( WSJ ) It is going to be important to watch employment and personal income numbers in the next few months to get direction on whether the current problems in the mortgage area are likely to spread in to other types of personal debt. My guess says it is already happening, and I am looking for the numbers to confirm it. As a very smart woman pointed out to me today, it is more normal for delinquencies to start with credit cards and spread in to home equity and mortgages, but this time we are experiencing the opposite. I suspect that the market is going to struggle a little more this week, and continue to be very vulnerable to the latest, breaking news.
Some other disturbing headlines worth paying attention to this week are the following:
- Bristol Myers Squib takes a $275 mm hit from sub-prime. ( WSJ) There are going to be a lot more of these types of announcements coming, a lot more.
- FBI opened criminal inquiries in to a number of companies as to their role in the whole sub-prime mess. Add to this a whole bunch of law suits that are likely to follow.
- UBS takes more write-downs – total of $18.4 for 2007. The problem with the banks is far from over, but will be an opportunity at some point.
The latest job report was far from favorable, noting that non farm payroll dropped by 17,000 in January, the first drop in more then 4 years. ( WSJ ) It is going to be important to watch employment and personal income numbers in the next few months to get direction on whether the current problems in the mortgage area are likely to spread in to other types of personal debt. My guess says it is already happening, and I am looking for the numbers to confirm it. As a very smart woman pointed out to me today, it is more normal for delinquencies to start with credit cards and spread in to home equity and mortgages, but this time we are experiencing the opposite. I suspect that the market is going to struggle a little more this week, and continue to be very vulnerable to the latest, breaking news.
Some other disturbing headlines worth paying attention to this week are the following:
- Bristol Myers Squib takes a $275 mm hit from sub-prime. ( WSJ) There are going to be a lot more of these types of announcements coming, a lot more.
- FBI opened criminal inquiries in to a number of companies as to their role in the whole sub-prime mess. Add to this a whole bunch of law suits that are likely to follow.
- UBS takes more write-downs – total of $18.4 for 2007. The problem with the banks is far from over, but will be an opportunity at some point.
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