Hello All:
Things are about to get very interesting. This has been floating around the blogosphere, and it now appears to be confirmed by The New York Times. The bond market has had enough of the Fannie/Freddie games.
I was first alerted to this today when Fast Money talked about how the credit spreads have now climbed close to the highs that we saw when Bear Stearns went bust in March. It looks like the bond vigalantes are back with a vengeance.
Here is the article from the Times:
"A year after financial tremors first shook Wall Street, a crucial artery of modern money management remains broken. And until that conduit is fixed or replaced, analysts say borrowers will see interest rates continue to rise even as availability worsens for home mortgages, student loans, auto loans and commercial mortgages. The conduit, the market for securitization, through which mortgages and other debts are packaged and sold as securities, has become sclerotic and almost totally dependent on government support. The problems, intensified by bond investors who have grown leery of these instruments, have been a drag on the economy and have persisted despite the exercise of extraordinary regulatory powers by policy makers.
Bond investors first stopped buying private home mortgage deals, then shunned commercial mortgages. Now, they are becoming wary of credit card debts and auto loans. In the first half, private securitizations reached just $131 billion, down sharply from $1 trillion in the same period last year, according to data compiled by Thomson Reuters.
Some analysts say investors are acting like the “bond vigilantes” of the 1980s and early 1990s. Those traders drove a surge in interest rates because they feared inflation and a mounting federal budget deficit. Their actions helped slow the economy and forced policy makers in Washington to rein in spending and raise taxes, at least for a time.
“The bond vigilantes took law and order in their own hands and pushed yields up, which would slow down the economy and bring down inflation,” said Edward E. Yardeni, an investment strategist who is credited with coining the term. “This time the bond credit vigilantes are refusing to go into the saloon and start drinking what Wall Street’s financial engineers are mixing.”
Money market funds, the short-term cash alternatives, grew to $2.9 trillion in June, up from $2.1 trillion a year ago, according to Crane Data. Those funds, in turn, have more than tripled their holdings of Treasuries and other government debt while reducing the share of their portfolios invested in somewhat riskier commercial paper and corporate notes.
The pullback is compounded by a continued rise in interest rates despite the Fed’s efforts to grease the wheels of finance by gradually slashing its benchmark rate to 2 percent, down from 5.25 percent last August. The average interest rate on a 30-year fixed mortgage climbed to 6.7 percent last week, from 5.89 percent in the spring.
“It appears that every time we peel away this onion, there is another layer,” said Curtis D. Ishii, the senior investment officer for fixed income at Calpers, the large California pension fund. He added that investors were starting to realize that the pain in the credit market would persist for some time."
Final Take:
Take this very seriously guys. The fear in the credit markets is back up to its March highs.
As you can see above, money market inflows rose $800 billion from $2.1 trillion up to $2.9 trillion in June versus this period last year. The money markets took this cash and put 75% of it in treasuries. You know the saying "follow the money"? This situation is no different.
The market is running out of Wall St. and heading into treasuries for cover! No one wants any part of the mortgage slop that Fannie/Freddie has put together. The bond market has had enough of Wall St.'s games and the jig is up folks.
Whats different about the current scare versus the March Bear Stearns blowup is the Fed is out of bullets. They are helpless to stop this correction because its the bond market that is taking rates higher. The Fed can't slash bond market rates! Money gets more expensive when fear and losses grip the street.
Bottom Line:
Its become pretty clear that the bond market doesn't buy into the Fed bailout of Fannie/Freddie. The fact that the bond market wants no part of the GSE's paper means that they are calling out the Fed on their guarantee that they will back the $5 trillion in Fannie/Freddie paper. This is a startling development.
If the bond market did buy into the Fed backing of the two GSE's, than they would be buying this mortgage paper hand over fist because they know its guaranteed by the government. Spreads would have narrowed significantly if the bond market bought it. Instead we are back to the highs of March! Mortgage rates now sit close to 7%!
This is a very interesting development and one that I did not expect. If the bond market continues to push rates higher than its lights out for the housing market and all of the garbage paper that sits on Wall St's books.
Be very very afraid folks. This isn't going to be pretty.
Wednesday, August 13, 2008
Tuesday, August 12, 2008
Contagion!
Good evening!
Today was an interesting day in the markets. We had another triple digit move today on the DOW today. Stocks quietly dropped about 140 points. It seems like anything under a 200 point move almost seems like a flat day the way the markets have been trading lately doesn't it?
The market badly wants to move higher as the dollar strengthens, commodities drop, and Europe starts to falter. This bullish sentiment is further fueled by the idea that the US will be the first country to recover from the global slowdown.
As a result, the bottom callers have been screaming that we have seen the market lows based on these data points.
As the bulls were reminded today, there is one big problem that refuses to die and continues to put a drag on the markets: Housing! The bursting housing bubble refuses to dissapear no matter how much the bulls try to put it behind them! Its like that little dog that refuses to let go of your pant leg no matter how hard you shake.
The news on the housing front was frightening today. Bloomberg reported that 1/3 of the buyers that bought homes within the last five years now owe more on their loan than their house is worth:
"Aug. 12 (Bloomberg) -- Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.
Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.
``For homeowners who need to sell, this is a gravely serious situation,'' Humphries said in an interview. ``It can also be harmful to communities where the number of unsold homes adds more to inventory and puts downward pressure on prices.''
The highest percentages of homeowners with negative equity were located in California. In four of the state's metropolitan areas -- Stockton, Modesto, Merced and Vallejo-Fairfield -- the number of homeowners whose mortgage debts exceeded the values of their properties topped 90 percent, Zillow said."
Quick Take:
I thought housing prices always go up? Ha! Obviously this is a nightmare scenario for anyone trying to sell a home. Very few homeowners have the cash to cover a short sale. This will eventually increase the number of foreclosures as buyers run out of options when they have to move or can't afford to pay the mortgage.
This will continue to weigh heavily on the financial stocks. They got creamed today by the way.
Contagion:
This is the biggest problem that the bulls face. The news today provided more evidence that this credit collapse is spreading into all asset types as the debt bubble bursts. Prime loans are even starting to become affected. From CNN:
"The next wave of mortgage defaults
More borrowers with good credit are defaulting on their home loans, and that's going to make it even harder for the staggering housing market to recover.
NEW YORK (CNNMoney.com ) -- Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.
The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics.
Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.
And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance.
"The extent of how bad these loans are doing is very troubling," said Pat Newport, real estate economist with Global Insight, a forecasting firm.
Washington Mutual (WM, Fortune 500) CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005.
Also last month, JP Morgan Chase (JPM, Fortune 500) CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier."
Further Evidence:
The contagion into prime loans isn't the only area of contagion as seen here from Bloomberg:
"Aug. 12 (Bloomberg) -- Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.
The writedowns and credit losses at more than 100 of the world's biggest banks and securities firms rose after UBS AG reported second-quarter earnings today, which included $6 billion of charges on subprime-related assets.
``It just keeps spreading from one asset to another, so it's hard to know when these writedowns will stop,'' said Makeem Asif, an analyst at KBC Financial Products in London. ``The U.S. economy needs to stabilize first. But even then, Europe could lag and recover later. There's still a lot more downside.''
Banks and brokers have raised $353 billion of capital to cope with the writedowns, according to data compiled by Bloomberg. The gap between losses and capital infusions, which now stands at $148 billion, has regularly narrowed to about $80 billion as capital raising follows writedown announcements."
Final Take:
The evidence of contagion is becoming overwhelming. The data on prime loans is flat out frightening. Notice that the delinquency rates on loans over $417,000 were almost double the rate of homes under $417,000.
The jumbo prime loans are supposed to be the loans of the rich and were considered to be safe. Now the data is showing that they have almost double the delinquency rates of the average middle income "subprime" homebuyer!
I have one question to ask. If the wealthy can't pay off their loans than who in the hell can? The answer is these jumbo loan buyers made the same stupid mistakes that the subprime low income buyers did. They bought houses that they couldn't afford!!
It appears that wealthy were even bigger morons when it came down to buying houses than their "subprime" counterparts based on these delinquency rates.
This is why contagion is setting in folks. The rich and the poor are both in deep trouble. Houses for the wealthy became just as unaffordable as houses for the middle class.
As a result, this economic mess is spreading into all types of loans. Cars, boats, student loans, you name it. The worst part about this is its coming at a time when the banks can least afford it.
This is going to force the banks to tighten their lending standards and raise interest rates which will push housing prices down even further.
Bottom Line:
I wouldn't touch financials with a ten foot pole here. The total losses from this debacle are expected to be about $2 trillion dollars according to economists like Dr. Roubini. The financials have currently written down about $500 billion.
I am no math major but this tells me we are about 25% through the writedowns that need to be taken by the financials.
The market woke up today and realized that this credit crisis is going strong. Waves of bad news from JP Morgan, Goldman, and UBS forced the markets to take a reality check.
The bulls will continue to ignore this glaring problem as they try to shake that pesky little dog off their leg.
Smart investors will realize that this little dog bites like a Tyrannosaurus Rex.
Today was an interesting day in the markets. We had another triple digit move today on the DOW today. Stocks quietly dropped about 140 points. It seems like anything under a 200 point move almost seems like a flat day the way the markets have been trading lately doesn't it?
The market badly wants to move higher as the dollar strengthens, commodities drop, and Europe starts to falter. This bullish sentiment is further fueled by the idea that the US will be the first country to recover from the global slowdown.
As a result, the bottom callers have been screaming that we have seen the market lows based on these data points.
As the bulls were reminded today, there is one big problem that refuses to die and continues to put a drag on the markets: Housing! The bursting housing bubble refuses to dissapear no matter how much the bulls try to put it behind them! Its like that little dog that refuses to let go of your pant leg no matter how hard you shake.
The news on the housing front was frightening today. Bloomberg reported that 1/3 of the buyers that bought homes within the last five years now owe more on their loan than their house is worth:
"Aug. 12 (Bloomberg) -- Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.
Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.
``For homeowners who need to sell, this is a gravely serious situation,'' Humphries said in an interview. ``It can also be harmful to communities where the number of unsold homes adds more to inventory and puts downward pressure on prices.''
The highest percentages of homeowners with negative equity were located in California. In four of the state's metropolitan areas -- Stockton, Modesto, Merced and Vallejo-Fairfield -- the number of homeowners whose mortgage debts exceeded the values of their properties topped 90 percent, Zillow said."
Quick Take:
I thought housing prices always go up? Ha! Obviously this is a nightmare scenario for anyone trying to sell a home. Very few homeowners have the cash to cover a short sale. This will eventually increase the number of foreclosures as buyers run out of options when they have to move or can't afford to pay the mortgage.
This will continue to weigh heavily on the financial stocks. They got creamed today by the way.
Contagion:
This is the biggest problem that the bulls face. The news today provided more evidence that this credit collapse is spreading into all asset types as the debt bubble bursts. Prime loans are even starting to become affected. From CNN:
"The next wave of mortgage defaults
More borrowers with good credit are defaulting on their home loans, and that's going to make it even harder for the staggering housing market to recover.
NEW YORK (CNNMoney.com ) -- Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.
The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics.
Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.
And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance.
"The extent of how bad these loans are doing is very troubling," said Pat Newport, real estate economist with Global Insight, a forecasting firm.
Washington Mutual (WM, Fortune 500) CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005.
Also last month, JP Morgan Chase (JPM, Fortune 500) CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier."
Further Evidence:
The contagion into prime loans isn't the only area of contagion as seen here from Bloomberg:
"Aug. 12 (Bloomberg) -- Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.
The writedowns and credit losses at more than 100 of the world's biggest banks and securities firms rose after UBS AG reported second-quarter earnings today, which included $6 billion of charges on subprime-related assets.
``It just keeps spreading from one asset to another, so it's hard to know when these writedowns will stop,'' said Makeem Asif, an analyst at KBC Financial Products in London. ``The U.S. economy needs to stabilize first. But even then, Europe could lag and recover later. There's still a lot more downside.''
Banks and brokers have raised $353 billion of capital to cope with the writedowns, according to data compiled by Bloomberg. The gap between losses and capital infusions, which now stands at $148 billion, has regularly narrowed to about $80 billion as capital raising follows writedown announcements."
Final Take:
The evidence of contagion is becoming overwhelming. The data on prime loans is flat out frightening. Notice that the delinquency rates on loans over $417,000 were almost double the rate of homes under $417,000.
The jumbo prime loans are supposed to be the loans of the rich and were considered to be safe. Now the data is showing that they have almost double the delinquency rates of the average middle income "subprime" homebuyer!
I have one question to ask. If the wealthy can't pay off their loans than who in the hell can? The answer is these jumbo loan buyers made the same stupid mistakes that the subprime low income buyers did. They bought houses that they couldn't afford!!
It appears that wealthy were even bigger morons when it came down to buying houses than their "subprime" counterparts based on these delinquency rates.
This is why contagion is setting in folks. The rich and the poor are both in deep trouble. Houses for the wealthy became just as unaffordable as houses for the middle class.
As a result, this economic mess is spreading into all types of loans. Cars, boats, student loans, you name it. The worst part about this is its coming at a time when the banks can least afford it.
This is going to force the banks to tighten their lending standards and raise interest rates which will push housing prices down even further.
Bottom Line:
I wouldn't touch financials with a ten foot pole here. The total losses from this debacle are expected to be about $2 trillion dollars according to economists like Dr. Roubini. The financials have currently written down about $500 billion.
I am no math major but this tells me we are about 25% through the writedowns that need to be taken by the financials.
The market woke up today and realized that this credit crisis is going strong. Waves of bad news from JP Morgan, Goldman, and UBS forced the markets to take a reality check.
The bulls will continue to ignore this glaring problem as they try to shake that pesky little dog off their leg.
Smart investors will realize that this little dog bites like a Tyrannosaurus Rex.
Monday, August 11, 2008
The "Speculator" Well has run Dry
A few random thoughts today:
I continue to be fascinated by the "schitzo" market that we now see before our very eyes. The markets in the new millennium are definitely different than the markets from previous century.
I blame a lot of this on the "speculator" money that has taken over a lot of the price action that is seen in the markets. Hedge Fund growth has soared and the larger ones now rival some of the investment banks in terms of assets. E-trade signs up 3000 new "daytraders" a day which just enhances the speculator froth.
Computer "quants" continue to grow and add to the confusion as they trade billions of dollars based on price movements in the stock markets on a day to day basis. Heck, its gotten to the point now where the quants seem to be making trades based on minute to minute price action.
So where does this leave the long term investor?
LOST! Its gotten to the point where its hard to make any long term calls because the stock movements are so violent on a day to day basis. Financials can rise or fall 10% each day depending on the news.
This makes it very difficult to buy stocks as a long term investor. If you buy on the wrong day, you may find yourself 10-20% underwater in a matter of days if bad news hits the markets. On the flip side, bear market rallies can toast the shorts during the same time frame.
So how did we get here?
Speculation, greed, and bubbles. Its pretty simple, when you have 25 straight years of prosperity(minus our little tech mess) and consumer growth, you forget the value of a dollar. As a result, you throw money around like candy thinking that you can always make more if you make a mistake.
We were quickly able to recover from the tech mess by simply blowing up the housing bubble. This was an easy recovery because the banks were very solvent and unemployment stayed at fairly low levels. When the Fed dropped rates to almost zero and held them there, the banks took the money out of their coffers and turned into Santa Clause.
If you had a pulse and job you were qualified for a loan! All of this easy access to money fueled the "speculation" mentality that now dominates our society. As a result, when the bubbles were allowed to form like housing via Fed policy, Wall St. and the speculators went hog wild buying and selling homes like they were baseball cards.
The mania of easy money spread into all parts of our economy. It gave private finance the ability to buy a huge car company like Chrysler. Homeowners borrowed against their home equity and bought Hummers and went on dream vacations. Americans stopped saving because they assumed their "home" equity was real money. Life was good until the music suddenly stopped.
So where are we now?
This is what the speculators are now asking themselves now that commodities are in a free fall. This was the last bubble left from the bull market that began in 2003 IMO. The bubble days are over folks. The easy money is gone, the banks are broke and so are many Americans.
The specs are now attempting to rotate into stocks. This move up has been moderatley effective so far but it will fail in the long run. Why? Because the economy sucks!!! Unemployment is creeping up towards 6%, the consumer has disappeared, and housing prices are free falling.
On top of this, the financials are broke and more importantly have lost their ability to make money going forward. Their business models are completely broken. Almost all of their profit was based on housing which is now dead.
So I ask one final question
When reality sets in and poor earnings are unable to prop up stock prices, where do the speculators go next?
My answer is nowhere. You must have liquidity in the market in order to raise the value of stocks or assets. Something has to have value or it will eventually fall in price. Right now there is very little value in stocks as we head into a consumer led recession.
When the speculator is forced to rotate into another sector and they realize there is nowhere else to go is when the markets are going take a big nosedive.
The rotation from commodities to stocks trade is working for now. What the speculators don't realize is they have rotated back into stocks that are littered with garbage, potential shoe drops, and reduced earnings power.
I am amazed at the piece of crap companies that have doubled during this rotation. MBIA, Ambac are up 100-300%. Hell even Washington Mutual is up 20% since this absurd rally started. Based on what? Do we now all of the sudden pay more for zero earnings growth? Is the stock market now valued based on how much money a company loses versus what it earned? This is insane!
Bottom Line:
History shows that stocks always end up being valued on earnings. Expect nothing different this time other than it might take a little longer.
I say this because the speculators have a lot of money to piss away after having so many years of easy money.
Chasing stocks like Ambac and MBIA tells you that the speculative money is desperate and cannot find any value in the market.
As the speculators run out of investment vehicles to chase, the market should get back to historical norms.
Until then, realize that there are major dislocations in the market. Stocks historically have been most vulnerable when these dislocations occur.
I continue to be fascinated by the "schitzo" market that we now see before our very eyes. The markets in the new millennium are definitely different than the markets from previous century.
I blame a lot of this on the "speculator" money that has taken over a lot of the price action that is seen in the markets. Hedge Fund growth has soared and the larger ones now rival some of the investment banks in terms of assets. E-trade signs up 3000 new "daytraders" a day which just enhances the speculator froth.
Computer "quants" continue to grow and add to the confusion as they trade billions of dollars based on price movements in the stock markets on a day to day basis. Heck, its gotten to the point now where the quants seem to be making trades based on minute to minute price action.
So where does this leave the long term investor?
LOST! Its gotten to the point where its hard to make any long term calls because the stock movements are so violent on a day to day basis. Financials can rise or fall 10% each day depending on the news.
This makes it very difficult to buy stocks as a long term investor. If you buy on the wrong day, you may find yourself 10-20% underwater in a matter of days if bad news hits the markets. On the flip side, bear market rallies can toast the shorts during the same time frame.
So how did we get here?
Speculation, greed, and bubbles. Its pretty simple, when you have 25 straight years of prosperity(minus our little tech mess) and consumer growth, you forget the value of a dollar. As a result, you throw money around like candy thinking that you can always make more if you make a mistake.
We were quickly able to recover from the tech mess by simply blowing up the housing bubble. This was an easy recovery because the banks were very solvent and unemployment stayed at fairly low levels. When the Fed dropped rates to almost zero and held them there, the banks took the money out of their coffers and turned into Santa Clause.
If you had a pulse and job you were qualified for a loan! All of this easy access to money fueled the "speculation" mentality that now dominates our society. As a result, when the bubbles were allowed to form like housing via Fed policy, Wall St. and the speculators went hog wild buying and selling homes like they were baseball cards.
The mania of easy money spread into all parts of our economy. It gave private finance the ability to buy a huge car company like Chrysler. Homeowners borrowed against their home equity and bought Hummers and went on dream vacations. Americans stopped saving because they assumed their "home" equity was real money. Life was good until the music suddenly stopped.
So where are we now?
This is what the speculators are now asking themselves now that commodities are in a free fall. This was the last bubble left from the bull market that began in 2003 IMO. The bubble days are over folks. The easy money is gone, the banks are broke and so are many Americans.
The specs are now attempting to rotate into stocks. This move up has been moderatley effective so far but it will fail in the long run. Why? Because the economy sucks!!! Unemployment is creeping up towards 6%, the consumer has disappeared, and housing prices are free falling.
On top of this, the financials are broke and more importantly have lost their ability to make money going forward. Their business models are completely broken. Almost all of their profit was based on housing which is now dead.
So I ask one final question
When reality sets in and poor earnings are unable to prop up stock prices, where do the speculators go next?
My answer is nowhere. You must have liquidity in the market in order to raise the value of stocks or assets. Something has to have value or it will eventually fall in price. Right now there is very little value in stocks as we head into a consumer led recession.
When the speculator is forced to rotate into another sector and they realize there is nowhere else to go is when the markets are going take a big nosedive.
The rotation from commodities to stocks trade is working for now. What the speculators don't realize is they have rotated back into stocks that are littered with garbage, potential shoe drops, and reduced earnings power.
I am amazed at the piece of crap companies that have doubled during this rotation. MBIA, Ambac are up 100-300%. Hell even Washington Mutual is up 20% since this absurd rally started. Based on what? Do we now all of the sudden pay more for zero earnings growth? Is the stock market now valued based on how much money a company loses versus what it earned? This is insane!
Bottom Line:
History shows that stocks always end up being valued on earnings. Expect nothing different this time other than it might take a little longer.
I say this because the speculators have a lot of money to piss away after having so many years of easy money.
Chasing stocks like Ambac and MBIA tells you that the speculative money is desperate and cannot find any value in the market.
As the speculators run out of investment vehicles to chase, the market should get back to historical norms.
Until then, realize that there are major dislocations in the market. Stocks historically have been most vulnerable when these dislocations occur.
Subscribe to:
Posts (Atom)