Thursday, November 5, 2009
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.
"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
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