Dec 25 2007
Amid all the corporate and Wall Street desperation to jump-start consumers through the holiday season, here’s a piece I’ve always found to be refreshing through all the noise.
Merry Christmas and Happy Holidays to all!
Dec 23 2007
As part of our Pavarotti holiday remembrance started last week, enjoy Ave Maria on this last Advent of 2007.
Dec 20 2007
“Its like playing in the band on the Titanic…some people think you have a job, the music is playing, its going to be ok. But we’re sinking. The ship is sunk. This will get worse for banks before it gets better.
That’s a direct quote from an old friend who works in the upper end of a billion dollar mortgage business. In response to a comment of mine, that things can’t be going so well when Wall Street is relying on bailouts from China, he said:
If not China to the rescue, then who? Somebody better come and save us…”
Indeed, the sea is stormy and here we are, with more bad news surfacing left and right, while many parties struggle to keep their heads above water. Who shall come and save them?
This week we learned that Morgan Stanley was selling a $5 billion stake to the Chinese government via their “sovereign wealth fund” in a move that coincided with a $9.4 billion charge on subprime related investments in the 4th quarter, taking the total to a whopping $10.8 billion in write-downs. How rare is this turmoil? For Morgan Stanley it is its first quarterly loss in its 72-year history of being ponied up nicely to the Federal Reserve printing press.
Today Bear Stearns joined in the fray, reporting its first quarterly loss in its nearly 80 year history, in a $845 million loss vs. $563 million profit. Bear Stearns had to write down $1.9 billion of its holdings in mortgage related securities.
The total so far is about $40 billion in write downs industry wide, but that figure undoubtedly is going to go a lot higher, with estimates of $250 billion to $500 billion being at risk through this.
Consider what’s happening to the credit / Bond insurers. In no uncertain terms we are witnessing carnage. Sheer carnage.
Dec 18 2007
For your information, here is listing of relevant articles providing context for our fundamental economic environment…
Second wave of SIV liquidity problems looms
The funding problems for the structured investment vehicles (SIVs) that have been at the centre of this year’s liquidity troubles are far from over in spite of a number of banks stepping in to support their vehicles.
Retailers Face an Ominous Holiday Sign
Sales of women’s clothing, a traditional pillar of the holiday shopping season, are unusually bleak so far this year, according to a major credit card company, an ominous sign for the retail industry.
Single-family housing starts hit 16-year low
Housing starts fell 3.7 percent in November, with construction of single-family homes sliding to the lowest level in more than 16 years as builders scrambled to cope with a deep drop in sales.
Grocery Bills and Energy Costs to keep growing
Cost of cooking at home expected to rise by up to 4.5% next year. Meanwhile, the Energy Information Administration forecasts a 17.7 percent jump in crude oil prices next year, with a corresponding 10.7 percent boost in the price of a gallon of regular gasoline.
Southern California Home Prices Tumble in Nov
The median home price in six Southern California counties plunged 10.3 percent in November, marking the biggest annual drop for any month in 20 years, a real estate survey said Tuesday.
U.S. Corporate Defaults to Quadruple as More Companies Cut to Junk
U.S. corporate defaults probably will quadruple next year after the number of companies that lost their investment-grade credit ratings rose at the fastest pace since 2003.
Dec 17 2007
The cost to borrow in euros for two weeks plunged after the European Central Bank added an unprecedented $500 billion to the banking system as part of a global effort to ease credit-market gridlock through year-end. The amount banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45 percent, the European Banking Federation said today. The rate had soared 83 basis points in the past two weeks as banks anticipated a squeeze on credit through the end of the year.
The fight is on, indeed, with the Euro CB working to paper over the real insolvency problems lurking beneath the surface that are not unlike those in the United States. Continues Bloomberg:
“These are strong-arm tactics intended to show the market they’re seriously committed to breaking the deadlock,” said Marc Ostwald, a fixed-income strategist at Insinger De Beaufort SA in London. “The ECB is helping to bankroll banks out of a problem that they themselves created.’
True enough, Mr. Ostwald. The question is will they break their fiat currencies at the same time? Consider what’s been happening in Italy in another Bloomberg article, for example: Continue Reading »
Dec 16 2007
With the Christmas fast Approaching, we thought a few clips of Pavarotti’s holiday performances might be a nice addition for those inclined. Above is Gesu Bambino circa 1975. We’ll add a few more next weekend and into the holiday as a year-end tip of the hat to one of the greatest ever.
Dec 14 2007
Today a guest article from colleague James Turk.
The opinions below are the author’s only and do not necessarily reflect those of Vigilant Investor or Ernharth Group, and those affiliated with this site will not be held liable for consequences from acting on the information. Please seek professional investment advice before acting on any educational information on this site. For additional disclosures, please read our site’s Terms of Use.
Dec 13 2007
We’ve warned, warned, and warned again: The CPI charade would eventually be unable to hide the damage of excessive money and credit expansion. Today’s news suggest the news might finally be getting out:
Wholesale prices shot up 3.2 percent, the biggest jump in 34 years, propelled by a record rise in gasoline prices.
I guess expanding the money supply does have its problems.
But, wait! The article continues:
Meanwhile, consumers put aside worries about the weak economy in November to storm into the shopping malls, pushing up retail sales by the largest amount in six months.
Wow. In 6 months? Heck, are you actually telling me retail sales during Christmas might be exceeding the doldrums of summer? What’s that? The sun also rose from the East this morning? Whew! Good news, that!
This is the real kicker from the article: Continue Reading »
Dec 13 2007
The Hedge Fund manager has issued a year end update. Here are some snippets:
Our Widows & Orphans Enhanced Money-Market Fund is under investigation by the Federal Trade Commission. It seems our use of the word “enhanced” is deemed incompatible with “real sorry we gambled that dollar you gave us for safekeeping on collateralized-debt obligations and ended up losing a cent or seven. Or 20. We’re not entirely sure yet…’”
…You know the saying “pay peanuts, get monkeys”? It isn’t true. We have been paying our traders peanuts since the fund’s inception, and it turns out that the annual rate of nut inflation is killing us at 11.5 percent given how low our investment returns have been.
Dec 12 2007
Last week we were treated to a housing bailout that really wasn’t, which sent the market into a multi day rally.
Yesterday it was a .25% cut in the Fed Funds rate, which apparently wasn’t enough when it was followed by a U.S. market plunge at the 2:00 p.m. announcement.
Today we’re presented with a humdinger of liquidity possibilities. The Federal Reserve, European Central Bank and three other central banks moved in tandem in raising the liquidity stakes in order to fight the credit squeeze threatening the global economies. It is, to quote Bloomberg, “the biggest act of international economic cooperation since the Sept. 11 terrorist attacks.”
The focus is on eliminating the stigma of banks going to the discount window due to their deteriorating collateral and to kick start the money markets back into action. The discount window is where a bank goes when the old Fed Funds rate doesn’t quite work. In effect, the plan is to hot-wire the liquidity into the system via other means with the TED Spread ( the difference between the 3 mos U.S. Treasury and the Euro denominated Libor, with Libor tending to represent corporate credit risk) back down. Libor has been well above expectations as absolutely nobody has been willing to lend into the uncertainty of the credit markets, with the subprime mortgage sector being at the epicenter of what many worry is a black-hole of cascading defaults.
Bloomberg again:
“This is shock and awe,” said Fred Goodwin, a fixed- income strategist at Lehman Brothers Holdings Inc. in London. “The fact that it’s coordinated means they have joined together in the war to attack the problem, which is that banks don’t trust each other.”
As this money is loaned into circulation, it’ll be auction time. Continue Reading »
Dec 10 2007
Paul Krugman did some back of the envelope math on the housing rescue plan:
Now, the idea of the deal is that it will avoid foreclosures, which are very costly — losing 40 to 50 percent of the value of the mortgage, according to some estimates. Suppose that’s right — and that virtually all the benefits of the deal go to investors, not homeowners. Then we’d be talking about $100,000 per mortgage, over say 150,000 mortgages. All told, $15 billion. In reality, it would be substantially less than this, both because borrowers will get something, and because some of the rescues will fail. So we’re almost surely looking at less than $10 billion in losses avoided.
Meanwhile, estimates of subprime losses to investors are currently running in the $300 -$400 billion range.
Well, the word is that there’s not a whole lot of oomph to this whole effort. Rather, it merely appears to be a PR effort that promotes options that already existed to borrowers. Nothing is being forced on anyone by the government, or so it would appear. For a more detailed analysis of that conclusions, check out what Calculated Risk had to say on the subject in “The Ten Things to Know About the Freeze.” Indeed, the lefties are up in arms that this bailout ain’t a full fledged liquidity fest, but is that bad?
That said, if the real objective is to keep overpriced assets inflated, then inflated they must be — somehow.
Dec 07 2007
Total credit market debt in the U.S. economy grew in the 3rd quarter from $ 46.573 to 47.864 trillion. Measured against GDP, the ratio of debt to GDP has hit a record 343%.
Mind you, two years ago in 2005 the ratio was at 308.1%, and for sobering reference, the last time credit bubbles had peaked so severely was in the lead-up to amid he great Great Depression: Continue Reading »
Dec 05 2007
From the “When will they ever learn?” files, Orange County, CA, joins Florida, Connecticut, Massachusetts, Montana, Maine and King County, Washington in disclosing problems related to massive SIV losses. Reports Bloomberg,
Twenty percent, or $460 million, of the county’s $2.3 billion Extended Fund is invested in so-called SIVs that may face credit-rating cuts, said Treasurer Chriss Street. In all of its funds, the county holds a total of $837 million of SIV debt, including $152 million in its $3.5 billion of money-market funds that isn’t under ratings review, said his spokesman, Keith Rodenhuis.
Bankrupted in 1994 by bad interest rate bets, Orange County — you would think — would be one of the more prudently run local governments when it comes to not being sucked into crowd approved behavior that ignores the rotten fundamentals beneath the surface.
`We’ll find out real quick if we have a problem,” said the county’s former Treasurer John Moorlach, who is now a county supervisor. “But for now I need to be patient and wait and see.”
Meanwhile, Blackrock as hired at the end of last week to help out the ailing Florida cash fund used by many of its local governments and school districts. The news could be better:
Much of the debt held by a $14 billion Florida investment fund for schools and local governments is worth less than face value and the rest is so troubled that its value can’t be determined, according to an official at the Wall Street firm hired to turn around the fund.
“I don’t think there are very many securities in this market we can liquidate at par,” or 100 cents on the dollar, Chris Stavrakos, co-managing head of cash management for New York-based BlackRock Inc., said in an interview yesterday.
The more than $2 billion of the worst securities that state officials agreed yesterday to spin off into a second investment pool have an “indeterminate value,” he said. Of that, about $867 million is in default, or 6 percent.
Is it any wonder that the Fed is now expected to couple a rate cut with measures to increase credit?
In our opinion, the bailout plans for subprimes reek of inflation and throwing good money after bad. Supporting activity that cannot support itself is not good for an economy, even if it temporarily papers over the problems for a time. That money has to come from somewhere, and it’s at the expense of the truly functioning productive economy.
Plan accordingly, and those of you serving as fiduciaries, you’d best be sure you’re not abdicating responsibilities, or for that matter, simply riding along on auto-pilot with the very same systems that allowed the garbage investments above to create such a royal mess!
Dec 04 2007
Moody’s lowered its rating on commercial paper issued by the Orion Finance structured investment vehicle, or SIV, to “Not Prime” on Nov. 30, saying its net asset value is inconsistent with Orion’s former Prime-1 rating. Montana owns $50 million of the paper. Moody’s put another $105 billion of SIVs on review for a possible downgrade, of which Montana holds $80 million and Connecticut holds $300 million, records show.
Connecticut’s Short-Term Investment Fund, which invests cash for state agencies and municipalities, is holding $300 million in debt issued by SIVs that may be downgraded by Moody’s. The state’s $5.8 billion fund held notes issued by SIVs affiliated with Citigroup as of Sept. 30: Beta Finance, Dorada Finance and Five Finance, according to its most recent quarterly report.
Connecticut also holds $100 million in defaulted SIV notes issued by Cheyne Finance.
Meanwhile, in Montana, they contemplate another problem:
(Senator Dave) Lewis, a member of the Legislative Audit Committee in Montana, questioned whether the state board’s policy of allowing pool participants to remove their money at full value, which concentrates the risk among those with money still entrusted to the pool. The majority of the money in the pool belongs to state agencies.
“I think we may need a special session of the state Legislature,” he said.
The market sure is cruel on its insistence that mispriced assets be rationally valued to clear the air. And it is just more pressure to get these assets marked to reality vs. marked to fantasy or political convenience.
Of course, the alternative is to flood more cash into the system so that these assets appear to be 100 cents on the dollar. But that’s a solution with a heavy price of its own.
