I hope everyone enjoys a nice BBQ today!
Although we are closed today, there was a lot of action in the world markets in reaction to our selloff last week. The Nikkei in Japan was down over 300 points and the Hang Seng was down 2.5%. Stocks in Europe were also in the red.
One of the key reasons for the drop was UBS's announcement. They came out today and said that further writedowns are coming, and admitted they still have considerable exposure to bad mortgage securities. Wow what a shocker..Not!!
Here are some of the highlights:
May 26 (Bloomberg) -- UBS AG, the European bank hardest hit by the U.S. subprime contagion, fell the most in more than two months in Swiss trading after saying it may face more losses from mortgage securities.
UBS declined 1.74 Swiss francs, or 5.8 percent, to 28.20 francs in Zurich, the biggest slump among the 59 companies on the Bloomberg Europe Banks and Financial Services Index. UBS has dropped 43 percent this year, cutting its market value to 61.4 billion francs ($59.9 billion).
``UBS will have to fight against negative news flow for at least several more quarters,'' said Rolf Biland, who helps manage about $3.1 billion, including UBS shares, as chief investment officer at VZ Vermoegenszentrum in Zurich. ``The U.K. housing market is almost as overheated as in the U.S., and could lead to losses for banks.''
The bank still has more than $45 billion in U.S. mortgage-related assets, $8.6 billion in leveraged finance commitments and $10.4 billion in U.S. student loans on its books.
The company hasn't said how much it holds in non-U.S. mortgage securities."
My Take:
The final paragraph that I highlighted shows you how much more potential damage is on the way.
How much do you want to bet that the majority of the $45 billion in mortgages in UBS's portfolio is mainly comprised of subprime loans. Is that a capital raising call that I hear? I am sure its coming soon. Dilution is on the way UBS shareholders!
The analyst above said the bad news could be flowing out of UBS for several quarters. I thought the worst was already behind us? As you can see boys and girls, we have a long way to go to get through this credit crunch.
Also, notice the last line of the highlights. They won't admit their exposure to non-U.S. mortgage securities. Looks like a second punch to the gut is coming from the European housing market.
Spain's housing market is crashing, and it looks like the UK market is right behind them(see below).
UK Housing Market starting to buckle?
It looks like we are not alone when it comes to housing bubbles. Housing prices in the UK have now dropped for the eighth straight month.
Some Highlights:
"May 26 (Bloomberg) -- U.K. home values fell for an eighth month in May and will probably drop further, Hometrack Ltd. said.
The average cost of a residential property in England and Wales slipped 0.5 percent to 172,200 pounds ($341,000), the London-based research company said today in a statement. Prices fell 1.9 percent from a year earlier, the biggest decline since November 2005.
``The `buyers' strike' continues,'' said Richard Donnell, director of research at Hometrack, in a statement. ``Pricing looks set to remain under downward pressure over the coming months.''
Bank of England Governor Mervyn King predicted this month that property values are ``likely to fall further'' and said there is a risk that the U.K. economy may contract.
Home buyers are paying more for mortgages after the global credit squeeze prompted lenders to curb lending. U.K. banks increased the cost of home loans with a 5 percent down payment to the highest in more than eight years in April, failing to pass on the Bank of England's three interest-rate cuts since December."
Final Take:
Sounds familiar doesn't it? Its becoming clearly evident that this may become a global slowdown versus just a United States problem. Housing is falling, and the high priced Euro is hurting manufacturing because goods are now too expensive to export. Europe is also facing the same high inflation that we are.
The global growth story is what the bulls have been hanging their hat on. If Europe and the US stop consuming then how are countries like Asia and India going to continue to grow if there is no one to buy their cheap goods? Asia's manufacturing is the key driver of their economy.
It now seems apparent that European banks like UBS are going to get clobbered by housing on both sides of the Atlantic. I wouldn't be surprised if a bank blowup happens overseas first.
The one/two housing punch could result in a KO.
It will be interesting to see how the US markets react to the world wide sell off and UBS/UK housing news.
We seem a little oversold from last week so I wouldn't be surprised to see a little bounce. However, with $130 oil, it will likely be mild. Longer term, a big sell off in equities is probable because the bad news simply isn't priced in to stocks.
The average drop in equities during a recession is 28% and we are nowhere near these levels. I predict this will be a severe recession so the potential for a larger sell off is definitely there.
Until next time!
No comments:
Post a Comment