JP Morgan thinks so, in the near term...
Does anyone remember February 2008 when the monolines were first being reviewed for downgrade and the market went in a frenzy and the CEO of Ambac was on CNBC? Who remembers that and what did you think then?
"We do not agree with the models! We repeat we are at no risk of defaulting. We have over $1B in claims paying resources!" the CEO Callen pleaded over and over again live on CNBC. Two years later and after at least two capital raising activities, Ambac is now at the end of their rope.
Even as recent as this Sept 26, 2008 interview with the CEO Michael Callen shows he is unrepentent about the financial risks to his firm and the system in general. Even in Sept 2008 the CEO claims to have $12B in claims paying resources. Good thing the rating agencies did not allow them to just shirk their responsibilities by moving those assets into a new subsidiary to avoid the existing liabilities (a.k.a. the shell game plan).
Here is the link -> "Ambac Insurance Unit May Be Put in Receivership"
Just a year ago this would have shook the financial sector. But since we started handing out money and the Dow is up, "hey, no problem!"
No recommendations other than encouraging everyone to stay defensive in general.
Thursday, November 5, 2009
FHA: Lending with a 20%+ default rate expectation
This blog has mentioned before that FHA is subprime in sheep's clothing. But how bad is it?
"Although the FHA has tightened credit standards, many of the 2007 and early 2008 mortgages are going bad. The agency expects defaults on 24% of all loans insured in 2007, and 20% of those backed in 2008. "The orders from Congress and us were clear: We want to save as many families as we can, recognizing that a lot of loans people were looking to refinance out of should never have been made in the first place," said Brian Montgomery, who served as the agency's commissioner for four years ending in July."(1)
Although there have been lots of assurances to the contrary, it looks like a bailout is now in the works.
"Two House Republicans warned that growing losses at the Federal Housing Administration could lead to a taxpayer-funded bailout and have asked the Department of Housing and Urban Development for data backing up the FHA’s assertion that it won’t need to ask Congress for any taxpayer money.
“Congress and HUD must take whatever steps are necessary to ensure that this program operates in a manner that does not expose the taxpayer to yet another bailout,” wrote Republicans Darrell Issa of California and Spencer Bachus of Alabama in a letter, dated Monday, to HUD Secretary Shaun Donovan."
Apparently news leaked that the stress tests used in the audit showed FHA is doomed at current capital levels.
Likelihood that a bailout will be avoided, I put it at 10%. But who cares, the DOW is up. Right?
(1) "FHA digs out after loans sour", WSJ, written by Nick Timiraos, Nov 4, 2009
(2) "FHA postpones release of audit as bailout worries mount" WSJ, written by Nick Timiraos, Nov 5, 2009
"Although the FHA has tightened credit standards, many of the 2007 and early 2008 mortgages are going bad. The agency expects defaults on 24% of all loans insured in 2007, and 20% of those backed in 2008. "The orders from Congress and us were clear: We want to save as many families as we can, recognizing that a lot of loans people were looking to refinance out of should never have been made in the first place," said Brian Montgomery, who served as the agency's commissioner for four years ending in July."(1)
Although there have been lots of assurances to the contrary, it looks like a bailout is now in the works.
"Two House Republicans warned that growing losses at the Federal Housing Administration could lead to a taxpayer-funded bailout and have asked the Department of Housing and Urban Development for data backing up the FHA’s assertion that it won’t need to ask Congress for any taxpayer money.
“Congress and HUD must take whatever steps are necessary to ensure that this program operates in a manner that does not expose the taxpayer to yet another bailout,” wrote Republicans Darrell Issa of California and Spencer Bachus of Alabama in a letter, dated Monday, to HUD Secretary Shaun Donovan."
Apparently news leaked that the stress tests used in the audit showed FHA is doomed at current capital levels.
Likelihood that a bailout will be avoided, I put it at 10%. But who cares, the DOW is up. Right?
(1) "FHA digs out after loans sour", WSJ, written by Nick Timiraos, Nov 4, 2009
(2) "FHA postpones release of audit as bailout worries mount" WSJ, written by Nick Timiraos, Nov 5, 2009
Tuesday, November 3, 2009
Is it time for the USD to show some muscle?
The US dollar has been kicked, spit on, and left for dead in 2009. Gold bugs, fiscal conservatives, and doomsayers all have abandoned the US currency in anticipation of economic meltdown due to the massive amount of debt spending to slow the crisis.
But have USD critics gotten ahead of themselves?
* Oil has overshot against the USD
Since March, USD has fallen less than 20% vs the Euro, but oil futures have increased 40% in anticipation of a collapse in the purchasing power of the USD. Yet that has not happened...
But have USD critics gotten ahead of themselves?
* Oil has overshot against the USD
Since March, USD has fallen less than 20% vs the Euro, but oil futures have increased 40% in anticipation of a collapse in the purchasing power of the USD. Yet that has not happened...
...and as time ticks by, the disparity between the increasing inventory of oil in the market and the demand on the exchanges becomes more and more peculiar.
* Even weaker currencies have gained 30% vs USD
Emerging market currencies such as the Colombian Peso, Brazilian Real, and Turkish Lira all have gained over 25% vs the USD in a just six months. Although their futures are bright, there are still significant political risk to emerging countries that is now disregarded in the purchase price.
* Lots of deflation on the horizon
The market has been bearish on the USD since March. But considering the wind down of stimulus in the next few months (Treasury purchases, MBS purchases, Cash for Clunkers) and also housing programs (HAMP, Housing Tax Credit), the deflation of reduced economic activity should be significantly bullish for the USD.
* USD is reaching historical support levels
Emerging economies need the USD propped up to maintain exports and keep the flow of hard currency into their country. This historical chart underscores the importance of the US economy to the world.
* Traders have moved to a net long position on the USD
In fact, it has been noted recently that traders have switched to a net bullish dollar position.(1)
* USD reversal could cause market mayhem
Many journalists remark on how the investment banks borrow from the Fed for free and invest in other currencies to obtain a spread. This is called a carry trade and it has helped banks such as Goldman Sachs, Morgan Stanley and JP Morgan book billions during this year. Roubini thinks an uptick in the US dollar will lead to a massive carry trade unwind.
“Everybody’s playing the same game and this game is becoming dangerous.”
The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually “bottom out” as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and “rush to the exit,” he said.
“The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.”(2)
The author of this blog thinks it is time for the USD to correct, but that it is too risky to play for a major spike in the USD. In the case there were unforeseen banking issues in Europe or in a significant emerging market, a run to the USD could be damaging to US banks who are leveraging USD.
The author recommends buying SCO under $13 and exiting above $15.5
(1) Forbes.com, "Stronger Buck Threatens Stocks And Commodities", Ryan Campbell, Nov 3, 2009
(2) Bloomberg.com, "Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble", Michael Patterson, Oct 27, 2009
Tuesday, October 27, 2009
If this is a recovery...
If this is a "recovery", then I need to take high school english again. Recovery from an injury means regaining health and mobility. I see little health in the following stats considering the massive stimulus it took us to get there.
First of all, how do job loss trends like this...
...translate into increasing home prices?
It must be this...
...since I don't see a rebound in Buffet's favorit metric...
...or here in US daily oil consumption (even though the reported numbers are only until July)...
Bottom line. All I see is a little prop up, not recovery. Remember, my previous blog mentioned that we are now at the peak effect of the stimulus and that it will wear off from here. At least the headlines have toned down from the cheery "That was easy!" messages of two months ago. Let's see if they turn into "This is kinda hard?" in March when the Treasury stops buying agency debt.
Friday, October 23, 2009
Stimulus Watch: More evidence US at the peak
Previously this blog noted that not only has the whole world enjoyed a stimulus boost but that US is at the very peak of stimulus spending. To date, this is the amount of funds that have been dispersed.
Now Christina Romer, Chair, Council of Economic Advisers in Testimony before the Joint Economic Committee is confirming suspicions…
“In a report issued on September 10, the Council of Economic Advisers (CEA) provided estimates of the impact of the ARRA (American Recovery and Reinvestment Act) on GDP and employment. ...
These estimates suggest that the ARRA added two to three percentage points to real GDP growth in the second quarter and three to four percentage points to growth in the third quarter. This implies that much of the moderation of the decline in GDP growth in the second quarter and the anticipated rise in the third quarter is directly attributable to the ARRA.”
In fact, Romer’s assessment is that after Q3 2009, the stimulus will provide no boost to GDP growth.
“Fiscal stimulus has its greatest impact on growth around the quarters when it is increasing most strongly. When spending and tax cuts reach their maximum and level off, the contribution to growth returns to roughly zero. This does not mean that stimulus is no longer having an effect. Rather, it means that the effect is to keep GDP above the level it would be at in the absence of stimulus, not to raise growth further. Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009.”
This might lead to an interesting confluence of events. Bank of America executives have said that there will be a spike in 4th quarter foreclosures as various State and Federal foreclosure moratoriums will wear off and mortgage modification programs are exhausted. “Cash for Clunkers” is now in the past. The home purchase tax credit, a dubious incentive itself, has been applied to maximum effect according to CalculatedRisk. CNNMoney.com also noted that despite extended benefits, 7000 people fall off of unemployment benefits a day.
But who is to say there will not be yet another stimulus program to compensate for this new situation? As long as the debt markets keep buying US debt, it seems that politicians will continue to find temporary solutions to draw out timelines for recapitalization of the financial system and consumers.
Now Christina Romer, Chair, Council of Economic Advisers in Testimony before the Joint Economic Committee is confirming suspicions…
“In a report issued on September 10, the Council of Economic Advisers (CEA) provided estimates of the impact of the ARRA (American Recovery and Reinvestment Act) on GDP and employment. ...
These estimates suggest that the ARRA added two to three percentage points to real GDP growth in the second quarter and three to four percentage points to growth in the third quarter. This implies that much of the moderation of the decline in GDP growth in the second quarter and the anticipated rise in the third quarter is directly attributable to the ARRA.”
In fact, Romer’s assessment is that after Q3 2009, the stimulus will provide no boost to GDP growth.
“Fiscal stimulus has its greatest impact on growth around the quarters when it is increasing most strongly. When spending and tax cuts reach their maximum and level off, the contribution to growth returns to roughly zero. This does not mean that stimulus is no longer having an effect. Rather, it means that the effect is to keep GDP above the level it would be at in the absence of stimulus, not to raise growth further. Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009.”
This might lead to an interesting confluence of events. Bank of America executives have said that there will be a spike in 4th quarter foreclosures as various State and Federal foreclosure moratoriums will wear off and mortgage modification programs are exhausted. “Cash for Clunkers” is now in the past. The home purchase tax credit, a dubious incentive itself, has been applied to maximum effect according to CalculatedRisk. CNNMoney.com also noted that despite extended benefits, 7000 people fall off of unemployment benefits a day.
But who is to say there will not be yet another stimulus program to compensate for this new situation? As long as the debt markets keep buying US debt, it seems that politicians will continue to find temporary solutions to draw out timelines for recapitalization of the financial system and consumers.
Thursday, October 22, 2009
Defensive Investing: Preparing for a currency war
Many people have been talking about how low interest rates and stimulus will devalue the USD. It is more interesting to talk about how long the Fed will apply pressure to the value of the USD and what to do about it.
Historical analysis that says that the Fed usually keeps rates low until 1 year after the peak of unemployment. Since we have not hit the peak of unemployment yet and do not expect it to occur until the beginning of 2010, the Fed will flood us with money until 2011. The USD has already lost 20% of it's value, and could lose another 10-20% more value in the next year.
But the economic policymakers outside the US are not naive. A low USD is like a tariff on imports for America. They know this and like to counteract the problem. On Tuesday Brazil put a 2% tax on all foreign investment into their country to devalue THEIR currency against all other currencies. The next day Turkey announced a similar proposal. Southeast Asian countries (Thailand, Indonesia, Hong Kong, Singapore, Malaysia) have started buying the USD to try to devalue their own currencies against the USD.
So what are we seeing, no one is going to take this lying down. It will turn into a currency war, with everyone racing to the bottom. Southeast Asia and Brazil can put in counter measures, but that only slows the progress. The USD will devalue, but at what price? The US has the biggest pump to flood the world with money, but it does not mean we will benefit the most from the flooding? Likely, but not necessarily.
What to do?: 100% of the known readers of this blog receive income in USD, have debt denominated in USD (if they have debt), and have over 90% of their available cash denominated in USD. A little diversity is a nice defensive measure and never hurt anyone.
As the USD devalues, emerging market currencies become more expensive and stocks in emerging markets equity prices rise. But in this environment owning equities is just like owning a lottery ticket. I think owning emerging market bond fund (EMB) or government debt of other countries (IGOV) in very small portion for a buy and hold scenario is a good step hedging step. Even better is just getting a CD denominated in currency in countries with 1) manageable deficits or no deficit 2) commodity exposure that is an Achilles heal to a devaluing USD (i.e. oil). Two safe choices for the next couple of years will be CDs denominated in the Brazilian Real or the Norwegian krone. Offered at Everbank.com with a minimum $10,000 deposit per CD, the CDs can be rolled every 3 months. The annual interest rate is 4.5% for the Brazilian real and .25% for Norwegian Krone. The money will be there and protected from the degradation of USD and is FDIC insured to boot.
Author recommends opening one rolling 3-month CD denominated in Brazilian Real and 3-month CD denominated in Norwegian Krone.
Historical analysis that says that the Fed usually keeps rates low until 1 year after the peak of unemployment. Since we have not hit the peak of unemployment yet and do not expect it to occur until the beginning of 2010, the Fed will flood us with money until 2011. The USD has already lost 20% of it's value, and could lose another 10-20% more value in the next year.
But the economic policymakers outside the US are not naive. A low USD is like a tariff on imports for America. They know this and like to counteract the problem. On Tuesday Brazil put a 2% tax on all foreign investment into their country to devalue THEIR currency against all other currencies. The next day Turkey announced a similar proposal. Southeast Asian countries (Thailand, Indonesia, Hong Kong, Singapore, Malaysia) have started buying the USD to try to devalue their own currencies against the USD.
So what are we seeing, no one is going to take this lying down. It will turn into a currency war, with everyone racing to the bottom. Southeast Asia and Brazil can put in counter measures, but that only slows the progress. The USD will devalue, but at what price? The US has the biggest pump to flood the world with money, but it does not mean we will benefit the most from the flooding? Likely, but not necessarily.
What to do?: 100% of the known readers of this blog receive income in USD, have debt denominated in USD (if they have debt), and have over 90% of their available cash denominated in USD. A little diversity is a nice defensive measure and never hurt anyone.
As the USD devalues, emerging market currencies become more expensive and stocks in emerging markets equity prices rise. But in this environment owning equities is just like owning a lottery ticket. I think owning emerging market bond fund (EMB) or government debt of other countries (IGOV) in very small portion for a buy and hold scenario is a good step hedging step. Even better is just getting a CD denominated in currency in countries with 1) manageable deficits or no deficit 2) commodity exposure that is an Achilles heal to a devaluing USD (i.e. oil). Two safe choices for the next couple of years will be CDs denominated in the Brazilian Real or the Norwegian krone. Offered at Everbank.com with a minimum $10,000 deposit per CD, the CDs can be rolled every 3 months. The annual interest rate is 4.5% for the Brazilian real and .25% for Norwegian Krone. The money will be there and protected from the degradation of USD and is FDIC insured to boot.
Author recommends opening one rolling 3-month CD denominated in Brazilian Real and 3-month CD denominated in Norwegian Krone.
Tuesday, October 20, 2009
The Fed: Saving the system by any means necessary
I am not sure when the US market lost the concept of rule of law. The idea that there are winners and losers is a concept lost during our recent crisis. But whenever it did lose it's way and start rigging the markets so blatantly, it was a sad day.
"Oct. 20 (Bloomberg) -- Bank of America Corp. signed off on its government-assisted purchase of Merrill Lynch & Co. after U.S. regulators said the deal might boost the shares, e-mails from two executives showed. Instead, the stock collapsed.
“The chairman of the Federal Reserve indicated it would be structured in a manner such that BAC stock should go up when announced,” Chief Financial Officer Joe Price said in a Dec. 29 e-mail to executives of the Charlotte, North Carolina-based bank, including Chief Executive Officer Kenneth D. Lewis."
The idea that the Federal Reserve is intervening to create the illusion of value in the purchase of an insolvant corporation strikes as market manipulation and the corruption of free markets. But who cares, the Dow is up, right?
Update on October 23rd: Apparently Mish Shedlock agrees with me...
"Oct. 20 (Bloomberg) -- Bank of America Corp. signed off on its government-assisted purchase of Merrill Lynch & Co. after U.S. regulators said the deal might boost the shares, e-mails from two executives showed. Instead, the stock collapsed.
“The chairman of the Federal Reserve indicated it would be structured in a manner such that BAC stock should go up when announced,” Chief Financial Officer Joe Price said in a Dec. 29 e-mail to executives of the Charlotte, North Carolina-based bank, including Chief Executive Officer Kenneth D. Lewis."
The idea that the Federal Reserve is intervening to create the illusion of value in the purchase of an insolvant corporation strikes as market manipulation and the corruption of free markets. But who cares, the Dow is up, right?
Update on October 23rd: Apparently Mish Shedlock agrees with me...
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