Jan 31 2008
Philip Manduca, who co-manages $2 billion as head of investments at ECU Group Plc, says “another death lunge still to come.” His arguments are close enough to give them a listen, especially on the Fed’s additional .50% rate cut and the consequent risks of inflation, currency weakness, and, generally speaking, the impending payback for years of free lunch Ponzi finance.
Give his interview with John Dawson of Bloomberg a watch here.
Jan 31 2008
Standard & Poor’s said it cut or may reduce ratings of $534 billion of subprime-mortgage securities and collateralized debt obligations, as home loan defaults rise. The downgrades may extend losses at the world’s banks to more than $265 billion and have a “ripple impact” on the broader financial markets, S&P said.
That’s from an article on yesterday at Bloomberg enunciating some of our concerns about the shock waves downgrades can have through the system. While the article elaborates on how nobody saw this coming, again we remind you to peruse our archives detailing this fiasco from day one.
Meanwhile, there’s this gem today, also from Bloomberg:
Jan 30 2008
Wall Street bond rating agencies are poised to downgrade two big bond insurers, Ambac Financial Group and MBIA, even though New York state insurance regulars would like to get a postponement until the state can develop a bailout package, CNBC has learned.Losing a Triple A rating could be devastating for the bond insurers, preventing them from drumming up new clients — and possibly forcing them out of business.
That’s from CNBC.com, who is reporting that those downgrades could come as early as today.
This is dicey business. As you may recall from a previously posted highly publicized outburst by Cramer a few weeks back, many on Wall Street believe the ratings to be sheer fiction. After all, in the case of MBIA, how does a AAA rated company end up having to borrow at 14% — a rate common for high yield junk debt — on its newly issued paper that’s since traded at higher rates (meaning the paper has subsequently lost its appeal even more!).
The problem is what these rating imply. Many bonds that otherwise would have had lower ratings rely on these monoline insurers to guarantee their payments, thus the insurers ratings are applied to the individual bonds. When those ratings go down - as we think is not a matter of if, but when, it’ll be passed on to existing bonds. That will lead us to valuation issues on existing portfolios containing those bonds, and the big question is how much has the market already pre-discounted them.
Jan 29 2008
That’s one heck of a question to tackle. To think one year ago the entire establishment of contemporary finance and news reporting couldn’t have dreamed such questions in their worst nightmares. Today, the Wall Street Journal is handling them as a matter of fact. My how far we’ve come. Unfortunately, there’s much to go.
Jan 29 2008
The City of Cleveland is not going to take the subprime mess lying down.
Cleveland is suing 21 of the nation’s largest banks and financial institutions, accusing them of knowingly plunging the city into a financial crisis by flooding the local housing market with subprime mortgage loans to people who could never repay. City officials hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.
As we suspected would be an issue, municipalities grew accustomed to balancing their budgets by reassessing bubbling home values in order to push revenue via property taxes. In many localities, when a home sells at market, it can effect the tax assessment of all neighbors. So long as housing frothed ever upward, tax revenues followed and the politicians continued to hand out free lunches rather than deal with trimming any fat. In many cases the windfall emboldened them to increase the free lunches. (Isn’t this what happened with cap gains taxes a few years ago during the tech bubble? Who is advising these people???!!)
Jan 29 2008
A 26% drop from a year earlier? How far we’ve come from those most prominent in contemporary finance — from the Fed on down — telling us there was no housing bubble just 18 months ago!
As for all the commentary that nobody saw this coming, that’s flatly wrong. Don’t buy it. A handful of observers have pointed out this was coming, and that it would get ugly. We keep beating that point not to pat ourselves on the back for being among that crowd, but rather because a good understanding of how this came to be is crucial for understanding where it will likely go.
That said, from that perspective, your editor disagrees that housing is in the 7th inning (of 9) of trouble. I suspect we’re at best, half way through. But even if housing were nearing its bottom, as we’ve pointed out over the last few weeks, too many other shoes are dropping or readying to drop that will continue this credit bubble malaise for a long while to come.
Jan 28 2008
How bad is it for housing? 60 Minutes provides a decent postmortem on the entry into the housing crash… If only they could haven warned people when it mattered –before it collapsed, like we did! The only thing missing is any revelation of where all this easy money came from. That answer is the Rosetta Stone of where we are in this crisis.
This piece truly puts a visual on the breadth of this crisis. One gentleman walking Steve Kroft through foreclosed properties when, towards the end of the piece, he thinks we’re lucky if we’re through the first 40% of this. Too bad the problem will not remain contained only to housing. As the monoline insurers backing many of the bonds continue to run into liquidity issues (e.g. Ambac, MBIA, and ACA Financial Guarantee) collide with the emerging problems in commercial and retail real estate, as well as those coming to the surface in revolving credit — credit cards, auto loans, etc. — we think 40% is a bit too optimistic.
As Jim Grant points out about all the assurances that this situation would remain “contained in subprimes,” and then “to just housing,” at best we can expect this will remain contained to planet earth.
Jan 23 2008
Here’s a decent clip that shows the debate is changing on the Federal Reserve as both Ron Paul and Jim Cramer discuss the fallacy that is the Fed. Tipping points are critical junctures where one paradigm closes while another opens. Such shifts can be dramatic.
As for our video, just five years ago you’d never hear a discussion like this hit the airwaves, and if it did, it’d be lost and forgotten as soon as the broadcast ended. Not so any more. As the markets digest, things will change.
Jan 23 2008
Stunning jump in foreclosures
Foreclosures and default notices skyrocketed to record peaks in California and the Bay Area in the fourth quarter of 2007, according to a report released Tuesday. The information was a fresh reminder that the slumping real estate market is continuing to have a serious impact on homeowners, particularly those with risky subprime mortgages. enders repossessed 31,676 residences in California in the October-November-December period, according to DataQuick Information Systems, a La Jolla research firm. That was a dramatic 421.2 percent increase from 6,078 in the year-ago quarter.
Unhappy home buyer, feeling misled on price, sues agent
Marty Ummel believes she paid too much for her house. So do millions of other people who bought at the peak of the housing boom. What makes Ummel different is that she is suing her agent, saying it was all his fault. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.
Real estate lawyers and brokers say the case, which goes to trial in North County Superior Court on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from the agents who found them a home and arranged its purchase.
“When your house appreciates $100,000 in the first six months, you’re not quite as concerned that maybe the valuation was $25,000 or $50,000 off,” said Clifford Horner of the law firm Horner & Singer. “But when your house goes down, you ask: ‘Who might have led me astray here?’ “
Jan 23 2008
No doubt, issues abound. If bond insurers go down as more problems come to light (e.g. commercial real estate and revolving credit / credit cards), the shock waves will be disastrous.
Municipal bond insurers such as MBIA Inc. and Ambac Financial Group Inc. had a good thing going.
For years, they earned some of the highest profit margins in any industry — by writing coverage for securities sold by states and cities to build roads, schools and firehouses. During the past five years, MBIA’s average profit margin was 39 percent, more than four times the average of the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Ambac’s average profit margin was 48 percent.
The good times are over, and the culprit isn’t municipal bonds; it’s subprime debt, a market the insurers waded into in pursuit of even greater profits. Some of the biggest bond insurers are facing potential claims that may deplete their capital. Their share prices have plunged, and credit rating companies are scrutinizing their AAA status. Ambac became the first insurer to lose its triple-A rating, when Fitch Ratings downgraded the company to AA on Jan. 18.
Bond insurers and ratings agencies, its now clear, had lost all perspective. Investors who were relying on these companies to properly assess and guarantee risk are now in serious trouble. What does that mean?
MBIA, Ambac Bailout by Government Looks Likely, UniCredit Says
MBIA Inc. and Ambac Financial Group Inc., the biggest bond insurers, are likely to be bailed out to avert worsening credit-market turmoil, according to analysts at UniCredit SpA.
“A kind of bailout supported by monetary authorities or governments is the only chance for the industry to survive,” Jochen Felsenheimer, the Munich-based head of credit derivatives research at UniCredit, Italy’s biggest bank, wrote in a note to investors today. “This bailout seems to be highly likely given the important role of bond insurers in the current market environment.”
That’s all fine, but its you and me who will be holding the bag. After what happened yesterday to Ambac, this is not terribly surprising:
Jan 23 2008
Soros Sees End of Dollar as World’s Reserve Currency
Billionaire investor George Soros said the fallout from the U.S. subprime crisis will bring about the end of the dollar’s status as the world’s reserve currency.
“The current crisis is not only the bust that follows the housing boom, it’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency,” Soros said in a debate today at the World Economic Forum in Davos, Switzerland. “Now the rest of the world is increasingly unwilling to accumulate dollars.’‘
That’s an article worth consideration. Soros is no fool. No doubt, the dollar has been used and abused in ways that only a false paradigm might justify.
Pimco’s Gross Says Fed Rate Cut a `Sad Testament’ (from yesterday)
“It’s a sad testament to think the Fed has to cut interest rates eight days in front of a meeting to salvage the equity markets,” said Gross, the founder and chief investment officer of Pacific Investment Management Co., in a Bloomberg Television interview. “The U.S. economy is in a rather sad state of affairs in that it depends on housing and stock prices to keep going.”
Today’s rate cut is the biggest single reduction since the central bank began using the rate as the principal tool of monetary policy around 1990.
Gross might be right on his assessment, but I’m convinced Bill also is the master of talking his book. He’s flip flopped on how serious this was going to be over the years, and has ended up much less reliable, even if a few nuggets here and there make sense. This observation is accurate. At least at face value.
Jan 23 2008
Foreign markets digested the Fed’s .75% rate drop, and were mixed. Most notably, the European Central Bank’s Jean- Claude Trichet made it clear the ECB will not follow the fed with a rate cut of its own, stating inflation was still its primary concern.
Otherwise, stocks have kicked off the day rocky. Within the first ten minutes of trading:
The Dow is down 18% already from its high last year. No doubt, uncertainty abounds and we suspect this is the markets finally coming to terms with the reality of False Paradigms.
Stay tuned as another volatile day plays out in the U.S. Economy.
Jan 22 2008
Cramer was blindsided like every other popular analyst, but to his credit he’s now calling BS when he sees it.
Host Question: How come AMBAC still has a AAA rating?
Cramer: Because the truth is too painful.
You can hear his comments and rants about the rampant “fiction” on Wall Street in this CNBC round table. He’s talking about fiction that includes the ratings agencies like Moody’s. It should blow you away not because Cramer is a blowhard, but because in this case he’s finally catching up.
Continue Reading »
Jan 22 2008
NEW YORK — Wall Street was expected to plunge at the opening of trading Tuesday, extending its huge losses from last week and taking more cues from heavy selling that has spread throughout the world. Indicators showed the Dow Jones industrial average was set to fall by more than 500 points when trading begins.Fears of a recession in the United States that could pull down the global economy as well have infected markets around the world, and those declines further unnerved U.S. investors who were unable to trade Monday, when Wall Street was closed for Martin Luther King Jr. Day. Meanwhile, U.S. bond prices soared as investors fled the stock market, and the price of oil skidded as investors dumped futures in the belief that a recession would slash demand for energy.
It looks like the markets are finally taking the credit crisis and recessionary risks seriously. It was as if a switch was flicked at the turn of the year, from “will there be a recession?”, to “Yikes! A recession! How long and how deep?”
Our answer? Deep. Long. And very liquid.
Continue Reading »
Jan 22 2008
Here’s a clip of Prudent Bear’s David Tice explaining why he thinks the markets are in a free-fall to Bloomberg T.V.
Here are the headlines:
Stocks Dive on Worries of U.S. Recession; Wall Street Unassuaged by Fed’s Interest Rate Cut
Wall Street plunged at the opening of trading Tuesday, propelling the Dow Jones industrials down about 400 points after an interest rate cut by the Federal Reserve failed to assuage investors fearing a recession in the United States.
Asia Stocks Fall, Extending Global Slump as Bear Market Spreads
Asian stocks plunged for a second day, sending the region’s benchmark to its biggest decline since April 1990, on concern the global economy is slowing.
Asian Markets Extend Losses Amid Worries That US Is Headed for Recession
Global stock markets extended their shakeout into a second day Tuesday, plunging amid worries that a possible U.S. recession will cause a worldwide economic slowdown. The dramatic declines were expected to spread to Wall Street, where stock index futures were already down sharply hours before the trading day began.
