It’s Clear Now We’re In A Liquidity Crisis
Some housing bubble news from Wall Street and Washington. Bloomberg, “IKB Deutsche Industriebank AG replaced its CEO and said profit will be ’significantly’ lower than forecast, hit by the U.S. subprime mortgage rout that it said 10 days ago would not affect it. The bank said in a statement it had to scrap its 280 million-euro ($382 million) earnings forecast as ‘massive uncertainty’ in the markets threatens access to funding.”
“State-owned KfW Group, which holds a 38 percent stake in IKB, said it will cover the company against potential losses. ‘One can only gawp at what happened,’ said Konrad Becker, an analyst at Merck Finck in Munich. ‘I’m asking myself whether KfW will be keeping its stake in the longer term.’”
“The bond market experienced ‘violent fluctuations’ last week and IKB’s creditworthiness was being questioned because of its exposure to subprime, the company said today. The ABX-HE-BBB- 06-1 index, tied to mortgage-backed bonds with the lowest investment-grade ratings, fell 17 percent last week, increasing this year’s drop to more than 60 percent, according to (the) administrator of the indexes.”
“Default swaps on Dusseldorf-based IKB Deutsche Industriebank AG IKB bonds jumped, trading at six times the prices of a month ago.”
“Investors are fleeing corporate credit at the fastest pace in seven years, Barclays Capital said in a report. More than 40 companies have abandoned or reworked loan and bond sales as yield premiums on corporate bonds rose to the highest relative to U.S. Treasuries since 2003.”
“‘It’s pure fear,’ said Gary Jenkins, a partner at London- based hedge fund Synapse Investment Management, which manages $650 million of debt assets. ‘It’s fear of the unknown, fear of hedge funds unwinding, fear of knock-on effects of the subprime meltdown.’”
“Hedge funds and insurers have reported declines in their subprime investments after adjusting their value to reflect the falls, a process known as marking to market. ‘The winds and rain have not fully subsided,’ Lehman Brothers Holdings Inc. fixed-income analysts led by Jack Malvey said in a research note dated today. ‘The storm may not fully abate until the end-of-month marks on July 31 and a day or two of final damage reassessment.’”
“‘Subprimemania is spilling into the real economy,’ said Jochen Felsenheimer, head of credit derivatives strategy at UniCredit SpA in Munich. ‘IKB’s statement was an end for those who believed this is a derivatives linked problem only.’”
“Default swaps linked to D.R Horton Inc., the second-biggest U.S. homebuilder, are quadruple their level of June 1. D.R. Horton, which last week posted an $823.8 million net loss, jumped $22,000 to $410,000.”
“Credit swaps on Fannie Mae and Freddie Mac, the U.S. government-chartered companies that are the largest providers of money for U.S. home loans, have almost tripled this month, with both contracts trading at $29,000 today, according to CMA.”
From Reuters. “American Home Mortgage Investment Corp. shares sank on Monday after the home loan provider announced ‘major’ writedowns, delayed a dividend and said lenders were demanding it put up more cash.”
“The announcement late Friday evening reflects how liquidity and credit issues affecting subprime lenders are extending to companies that make home loans to borrowers considered to be good credit risks.”
“American Home specializes in prime and near-prime loans. It has, however, made many loans that allow borrowers to produce little documentation. The company recently commanded a roughly 2.5 percent share of the U.S. mortgage market.”
“‘Bankruptcy is not out of the question,’ said Matt Howlett, an analyst at Fox-Pitt Kelton Inc.. ‘It needs to find a partner with alternative funding and hope the market turns around. It’s going to be tough.’”
“He added, ‘It’s clear now we’re in a liquidity crisis. Any loans that aren’t pure prime are falling in value.’”
“‘The disruption in the credit markets in the past few weeks has been unprecedented in the company’s experience and has caused major writedowns of its loan and security portfolios and consequently has caused significant margin calls with respect to its credit facilities,’ the company said.”
The Street.com. “American Home Mortgage…delayed paying its quarterly dividends, citing margin calls and writedowns.”
“The Melville, N.Y., lender said it delayed the payments ‘in order to preserve liquidity until it obtains a better understanding of the impact that current market conditions in the mortgage industry and the broader credit market will have on the company’s balance sheet and overall liquidity.’”
“American Home is not the only Alt-A lender feeling pain. Alliance Bancorp, an Alt-A lender in Brisbane, Calif., shut its doors this month. According to a letter posted on its Web site on July 13, CEO Lisa Duehring said Alliance had ‘exhausted our resources’ and ‘do not have the means to move forward.’”
“The U.S. credit markets opened with an ‘extremely negative tone’ on Monday, with credit default swaps sharply wider amid fears that fallout from subprime mortgage losses is spreading, according to Barclays.”
“‘The subprime losses, which most investors had assumed would be absorbed by otherwise profitable banking operations, now appear to be spilling over into the markets at large,’ Barclays said in a report.”
The Baltimore Sun. “Black & Decker is having trouble selling lock sets for doors. Most lock sets are installed in new homes. And new homes aren’t selling.”
“‘The fact is, the housing market has everyone spooked,’ said Bob Goldsborough, VP of research at Ariel Capital Management, Black & Decker’s second-largest shareholder. ‘The results that you see in Black & Decker today are not all that surprising. You’re seeing this play out in any area that housing touches. Demand is really, really weak, and it’s going to be weak for a while.’”
“‘Black & Decker is not alone,’ said R. Bentley Offutt, a securities analyst. ‘Companies that are related to the homebuilding industry are all having a rough day of it.’”
The St Petersburg Times. “It’s no secret that the housing malaise is infecting other industries. But the variety of those affected keeps growing.”
“Car retailing giant AutoNation, parent of the AutoWay dealerships in the Tampa Bay area: ‘Results for the first three and six months of 2007 were adversely impacted by a decline in new vehicle sales especially in California and Florida, driven in part by continued weakness in the housing market. To the extent that we continue to see weakness in the housing market, we anticipate that our sales trends will be adversely impacted.’”
“Boat manufacturer Brunswick Corp.: ‘Higher interest rates, weak housing markets and higher prices for fuel, food and other essentials have continued to erode consumers’ disposable income. Further, the depressed housing situation is most pronounced in Florida and California, which are two of the nation’s largest boating markets,’ said CEO Dustan E. McCoy.”
“Media General, parent of the Tampa Tribune: ‘Our second-quarter results mostly reflected a decrease in publishing division operating profit, driven primarily by a significant decline at the Tampa Tribune.’ said CEO Marshall N. Morton. ‘Florida’s economy…has dramatically reversed, driven by an adjustment in the housing market following several record-breaking years.’”
“U.S. foreclosures rose 58 percent in the first half of 2007 from a year earlier, led by California and Florida, as more homeowners fell behind on their monthly mortgage payments, RealtyTrac Inc. said.”
“The company for the first time reported on what it calls ‘unique addresses,’ or properties that have had at least one foreclosure- related legal filing. In previous reports, RealtyTrac had only reported the number of legal filings, which could have resulted in properties being double and triple counted.”
The Star Telegram. “The national housing slump brought a crashing end to D.R. Horton’s 29-year streak of profits. CEO Donald Tomnitz said there is no relief in sight.”
“Tomnitz cited several reasons for Horton’s continued troubles: Larger incentives to buyers are cutting into profits. Higher prices and higher interest rates are reducing buyers’ ability to afford new homes. Tighter mortgage financing is affecting the buyer pool.”
“‘In some instances across the country, we’re trying to qualify the same buyer two and three times, based upon the changing conditions in the marketplace,’ Tomnitz said.”
From CNN Money. “A hedge fund manager whose fund ran into trouble from the sell-off in securities backed by subprime mortgages is having to put his huge yacht up for sale.”
“John Devaney, the CEO of United Capital Markets, a fund that specializes in buying and selling bonds that are backed by the mortgage payments, particularly adjustable rate subprime mortgages, has put his 142-foot yacht up for sale, according to a yacht broker’s Web site.”
“Devaney told Money magazine this spring that despite problems that the loans cause for borrowers, the assets backed by them provided a good return for his fund.”
“‘The consumer has to be an idiot to take on those loans,’ he said. ‘But it has been one of our best-performing investments.’”
‘Citadel Investment Group LLC took over the credit holdings of Sowood Capital Management LP, the hedge-fund firm started by former Harvard University endowment manager Jeff Larson.’
‘Sowood, which manages $3 billion, said July 27 that its bonds fell in value as investors fled riskier debt such as subprime-mortgages and bonds used to fund leveraged buyouts. The risk of owning corporate bonds soared today to the highest on record in the U.S. and Europe, credit-default swaps show.’
Expect a lot more of this. My short portfolio is heavy on the ‘enablers’ of the credit foolishness. Credit insurers (MTG, ABK), ratings services (MCO) and I-banks (BSC, LEH) and leveraged market players (BX, FIG). The housing shorts appear played out for now since many have taken the largest writedowns we’ll see for this cycle but there will be quarterly losses and further writedown. I just don’t think the size of the future charges will shock anyone. HOV hasn’t taken their medicine yet so they’re still on the docket.
Homebuilder used to sell at 0.3x sales. With sales still falling, we don’t know how low they can go on a fundamental basis but they are now heavily shorted and technically oversold. That creates too much potential for a near-term reversal upwards. Will re-short if there is a substantial one though.
Hopefully you are long Deutsche Bank, their earnings come out tomorrow and (to my limited knowledge) they seem to be the single largest short of ABX and all housing related derivatives over the last 3 years. Their predication over the last three years “ripe for a correction”. Even getting the KKR financing shoved on them last week, they will show an incredible profit from the Sub-prime fallout. A nice way to hedge loans, you would never write. I can imagine the conversation “They want to borrow money with No income, no assets no job? No way. Oh, you just wanted to see if we could get a better rate, well who is doing these loans? I see. (hangs up and redials the market broker) Sell me as many of these ABX future forwards as possible - hedge funds will buy them - they buy anything.”
Bozo the Cramer just said to sell anything real estate. ofcourse he sold he’s last piece of real estate this past Saturday for $200K under list. A beach house he later said was bought by an idiot!
Haha. This guy takes the middle road last week. Talking about the players in real estate he would invest in, and then after he sells he’s last anchor, ie property, it’s sell, sell, sell all, and anything to do with real estate. He also stated that what could turn this market is a 100 basis point lowering of interest rates by the fed. haha, fat chance.
I despise listening to that guy, so I don’t. I’m not sure what the attraction is.
I thought I was the only one who thought Cramer was a certified Grade A douche bag liar. Momentum investor. Real genius.
Anybody see the video of JC basically telling people how to manipulate the markets and admit that he used to do it? Then he goes on to say the regulators would never do anything since they are too stupid to even understand. It was on youtube for a few days before it was taken down. Apparently CNBC complained of a “copyright violation.”
The guy is scum and as arrogant as they come.
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We were told that it was the abundance of liquidity that would keep the economy and the markets going. It there a leak or the main pipe burst?
Jas
Jas
I hate the term ‘liquidity’ as it’s often used by the industry and media. What they really mean is “willingness to go deeper into debt despite being in debt up to your eyeballs already.” But I suppose ‘liquidity’ is a convenient shorthand and much better for marketing purposes. This is not directed at you, just ranting about one of my pet peeves.
Real liquidity is cash and instruments that can be quickly and easily turned into cash at face value. What we have today is the opposite of that - a system clogged with dodgy, complex paper that’s impossible to sell when you need to.
That said ‘liquidity’ (in the present, corrupted sense) is a coward. Banks are quick to pass out umbrellas when the sun is shining and even quicker to grab them back when it starts to rain. So has it always been.
That said ‘liquidity’ (in the present, corrupted sense) is a coward. Banks are quick to pass out umbrellas when the sun is shining and even quicker to grab them back when it starts to rain. So has it always been.
Beautifully put.
Whom was that a quote of? Roosevelt?
Got popcorn?
Neil
Nevermind, I saw GetStucco’s answer: Mark Twain.
“Real liquidity is cash and instruments that can be quickly and easily turned into cash at face value.”
Does it matter how well the cash is storing value?
GS
It sure does matter. But I’d still rather have my money depreciating 5% per year but available at par rather than taking an additional 30-40% (or more) haircut to sell.
A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.
–Mark Twain–
Its funny watching all these banks, investors, and large pension funds try to make withdrawls from all these hedge funds. Then as they watch the margin calls they all get screwed.
GS
Thanks. Couldn’t recall the attribution or the exact quote so I just paraphrased.
Reminds me of the Bay Area after the dotcom blowup. Banks were willing to extend business lines to local companies, for, say $1MM, but only if they deposited $1MM in the bank.
They would only lend money to people who didn’t need the money. When times are tough, the quote is perfectly applicable.
And now times are not all that tough (just ask someone who went through the depression), but are getting tougher. Borrwing is going to be more and more difficult.
The only difference between the tax-man and the taxidermist is that the taxidermist leaves your skin.
– Mark Twain
Banks always want to lend you money when you don’t actually need it.
‘It’s clear now we’re in a liquidity crisis. Any loans that aren’t pure prime are falling in value.’
Seems we aren’t done yet. Sooner or later, the 20% down folks will be underwater in some markets. And even if none of them get “walk away” fever, there will the usual job losses, illnesses and divorces, un-bailed out by rising prices. The mortgage rates were too low for a normal rate of foreclosures, combined with falling values.
we are certainly not done yet; despite all the news from the US crazy financing continues at the same pace in most of Europe. In Netherlands and some other EU countries, mortgages are still extremely cheap and home prices keep accelerating. Only the ‘free money’ ads on TV are showing somewhat higher interest rates lately. The US subprime problems and their effect on the stock markets were briefly mentioned in the papers here, but everything suggests that in Europe this cannot happen because we have responsible lending, home prices will grow into the sky forever and we always have the government to come to the rescue if necessary. If the liquidity crisis does not spread beyond the US people will not learn their lesson and it will be off to the races (for even more credit) again very soon.
I think it is impossible for the crises in US economy not to affect European and Asian markets. It is just a matter of time…
I agree it should matter, but don’t these EU credit managers read newspapers and use their brains? Why are they still continuing business as usual?
When everything was going to hell after the ruble and Asian crises, the tech bubble, then 9/11 it was US consumer spending that drove the rebound. It pulled first the US, then the world economy out of a ditch. But now US consumer spending has fallen from 3.5-4.0% growth, where it was for years to 1.3%. But that doesn’t matter; you see globalization only works when things are going up. When things are going down, they are ‘contained.’
I guess that hedge funds quit buying assets across borders, so problems in one region won’t spill over elsewhere. Maybe international trade has disappeared as well so weakening consumer demand won’t affect Asia.
The doublethink amazes me. Key drivers of the expansion don’t matter when they falter. Just like housing was responsible for about 40% of all new jobs since the last recession but now we’re supposed to believe that job growth is still strong with construction cratering.
The doublethink amazes me. Key drivers of the expansion don’t matter when they falter. Just like housing was responsible for about 40% of all new jobs since the last recession but now we’re supposed to believe that job growth is still strong with construction cratering.
Just like they said in 2002 & 2003 that housing was the only thing keeping the economy going, now we’re supposed to believe it will have no effect on bringing the economy down.
ot - can someone tell me wtf? the markets were bouncing. i realize i have no clue because to me they should be tanking every day not just 2.
NZH: O/T but they had a special on tv here over the weekend touting housing in the Netherlands. Featured was housing turned into boats that would float up and down with the ebb and flow of the water levels. It was supposed to be the new ‘in thing’. Can you put some reality on the picture?
the reality it that Netherlands, despite being for a big part below sea level, the total number of homes using this kind of technology for protection is extremely small (less than 0.01%). I’m from Zeeland, the Delta near the coast where the 1953 storm flood happened. In my city (the regional capital) there is ONE floating home.
just in case you wondered: http://tinyurl.com/3×7dd2
In another part of the province a small village is under development with floating homes where protection against flooding is part of the idea. But most of the floating homes are more about living close to the water (for recreation) or being able to live in protected areas (non-permanent dwellings), and have nothing to do with flood protection. There are some other experiments with floating homes in other parts of the country (usually floating concrete shells with relatively normal homes built inside, sometimes the roads in these developments float as well), but it’s all really insignificant. Maybe the trouble is that you can run out of land, but it is difficult to run out of water here - so I guess the RE mob doesn’t like the idea
‘crazy financing continues at the same pace in most of Europe. In Netherlands and some other EU countries,’
Which ones? Do you have an update on France?
“…despite all the news from the US crazy financing continues at the same pace in most of Europe.”
There can be a long time lag between the moment when a chicken’s head is chopped off and when it finally stops running.
a long and FUN time lag
Doubtful. Plenty of pure-primes are mixed with subprimes at the household level (prime with piggyback subprime for downpayment).
What deems a loan “pure prime”?
I don’t know. Are the “prime equity lines” held by Countrywide that went way up on default rates “pure prime”?
“Any loans that aren’t pure prime are falling in value.”
Remember, an 80% LTV loan becomes a 100% LTV loan if your house ‘value’ drops 20 percent…
come on now…not all of the apples in that barrel are bad. the good ones are still left.
something about that does not sound very encouraging if im the one that bought the barrel.
“Hedge funds and insurers have reported declines in their subprime investments after adjusting their value to reflect the falls, a process known as marking to market. ‘The winds and rain have not fully subsided,’ Lehman Brothers Holdings Inc. fixed-income analysts led by Jack Malvey said in a research note dated today. ‘The storm may not fully abate until the end-of-month marks on July 31 and a day or two of final damage reassessment.’”
Ha, ha. That’s what they think. Over the last several months, we’ve seen hedge funds that screw the pooch one month get hit with huge redemptions once they report the results. Why wouldn’t we see a continuation of that pattern? But this time it will be worse and more widespread since all credit markets are getting hammered now globally instead of just US residential mortgages. DUH!
How can they “mark to market” before holding fire sales of submerged assets to determine where the true market value lies?
How can you mark to market when there is no one left that wants to buy them? I guess that’s what the number ‘zero’ is for…
Like houses, these assets can be sold in less than a week (perhaps within minutes or even seconds when vulture hedge funds are waiting in the wings to snap them up), provided the list price is “marked to market.”
Warren Buffet won’t even buy this crap and he is the one buying when everyone else is selling.
Good point.
If Buffet isn’t buying, it isn’t underpriced… yet.
Got popcorn?
Neil
Buffet’s Berkshire Hathaway has lagged the overall market for some time. Perhaps some feel $3,600 for a B share is too much?
Don’t know if even Berkshire can properly value these complex derivatives as long as the underlying securities are so volatile. One of the smartest of the pension funds CALPERS admitted that they couldn’t value those things and withdrew from the market last year.
Buffett wants NOTHING to do with derivatives. True Buffett fans know this…
good question, I guess they are switching to another fancy mathematical model to come up with the right valuation; fully approved by the usual crooks of course.
At some point (maybe even now), credit contraction becomes a self-fulfilling prophesy; a vicious cycle where tightening credit makes it much harder for Goldilocks to ‘perform’, which makes things more risky for credit issuers, which in turn tighten credit even more. It’s the exact opposite of what happened on the way up.
The virtuous cycle turns vicious.
“…tightening credit makes it much harder for Goldilocks to ‘perform’…”
Goldilock’s sphincter is tightening up. I am not sure how that will affect her ability to ‘perform’ though.
SHHHH, that is EXACTLY the type of comment that would attract a post by Auger-Inn…
Augur is happily frolicking in the Maritimes–Nova Scotia–look what opportunities for comment he’s missing.
i’d rather be in ns - but this blog is a fair substitute…. a hedonic nova scotia.
“CEO Donald Tomnitz said there is no relief in sight…Higher prices and higher interest rates are reducing buyers’ ability to afford new homes.”
Foregive me if I’m missing something, but *WHAT* HIGHER interest rates? Last I looked, rates are incredibly low, compared to the long term averages. Is it that people still believe that the only things that can tank a housing market are a bad economy and rising rates, so the pull out the “rising rates” card to explain events that “shouldn’t be happening”?
Great point. Rates are still ridiculously low by historical standards and probably negative in real terms when you consider the real world inflation that is currently being defined out of existence by our monetary authorities.
Price of debt is re-setting big time and lots of folks whose business models depended on the assumption of cheap debt being available forever are going to experiance some rough times IMHO.
I don’t remember in my 59 years ever seeing rates stay this low for this long.
in Netherlands last years rates where the lowest in 400 years; currently they are slightly higher but still … credit conditions are still EXTREMELY loose, especially if you look at the real, undoctored, inflation statistics.
you gotta love that you tracked the rates for 400 years! But it really should give one pause because it illustrates how atypical this whole thing is
A colleague told me that he’s looking to get a home loan, and given the recent drop in the 10-year (about 25bps), thought GREAT, let’s lock the rate in now that the rate dropped.
Mortgage broker told him that the rate hadn’t dropped. The investors aren’t interested in lending for less.
Spreads are widening, all else being equal, rates are increasing.
Still going…
“The ABX-HE-BBB- 06-1 index, tied to mortgage-backed bonds with the lowest investment-grade ratings, fell 17 percent last week, increasing this year’s drop to more than 60 percent, according to (the) administrator of the indexes.”
ABX-HE-BBB- 07-2 7 2 500 0A08AOAD9 39.97 50.33 39.97
ABX-HE-BBB 07-1 7 1 224 0A08AIAC4 39.65 98.35 39.65
ABX-HE-BBB- 07-1 7 1 389 0A08AOAC1 38.03 97.47 37.72
http://markit.com/information/affiliations/abx.html
I love to see the Security houses do CYAs before a stock opens, RBC and Capital Markets downgrade AHM before stock opens. The infamous ‘We warned you’ statement.
30-Jul-07 RBC Capital Mkts Downgrade (from Outperform to sector Perform)
30-Jul-07 JMP Securities Downgrade (from Mkt Perform Mkt Underperform)
“RBC and Capital Markets downgrade AHM before stock opens”
Now *that’s* funny!
What about shorting First Federal, apparently lots of neg am exposure?
Already dropped $20 since May, along with DSL. Dunno how much more it’s going to go before a rebound.
Rebound?!? Surely you jest!
Bay area foreclosures up:
http://tinyurl.com/2×24uw
To many people in the affluent Bay Area, losing a home to foreclosure sounds like a Depression-era relic or a Rust Belt phenomenon. Our real estate prices have defied gravity for so long; our job market is so strong; our cachet as a place to live seems so obvious. How could foreclosures happen here?
But in recent months, the Bay Area has proven to be home to numerous victims of the subprime loan debacle.
Hard to believe they managed to write the AHM story without mentioning that trading was halted before the exchange opened. Any bets on when & if it will trade?
sorry, I mean that they wrote it backwards so that if you didn’t already know that there was no trading you ‘d miss it.
Mixed up, like my comments today. Oh well.
“‘The consumer has to be an idiot to take on those loans,’ he said. ‘But it has been one of our best-performing investments.’”
This is one for the record books. A lot of companies made money hand over foot on J6P “the idiot.”
Perfect quote for a t-shirt.
Best performing investments because they got to book the whole payment as revenue, even if it is deferred. I wonder if he got his bonus based on that but his investors are screwed?
>
All economic and political commentary is about people’s behavior, the leaders’ and the led’s. Crooks leading “the idiots?” It is going to be one hell of a bust when idiots run out of money, or God-forbid the jobs, and Crooks run out of customers, or worse yet, are run out of town.
Jas
Err, what happens when the idiot consumer defaults on the loans Mr Obnoxious ? Are they still going to be you best performers ?
When that happens, then it will be time to sell the boat.
John Devaney has proven himself to be the bigger idiot. Heh. Love those margin calls.
Guess I didn’t have to wait 5 years to see where this guy ended up….
“‘In some instances across the country, we’re trying to qualify the same buyer two and three times, based upon the changing conditions in the marketplace,’ Tomnitz said.”
This in a nutshell explains why the Mortgage Applications number has become so useless as a measure of housing demand.
“The national housing slump brought a crashing end to D.R. Horton’s 29-year streak of profits. CEO Donald Tomnitz said there is no relief in sight.”
Whowuddathunk it could happen to the good people at DR Horton? I am stunned!
I am actually surprised. This means that DR Horton hasn’t taken a loss since 1978. TWO housing cycles have passed without them losing money.
Kind of puts the severity of this housing cycle into perspective, doesn’t it?
“TWO housing cycles have passed without them losing money.”
Thats what I was thinking. They profitted through the bad times even during the time in California from I understand a lot of Land Developers closed up shop in the early 90’s. That seems like really bad news for new home builders. Though I may be wrong since the stock market is somehow going back up again.
“A hedge fund manager whose fund ran into trouble from the sell-off in securities backed by subprime mortgages is having to put his huge yacht up for sale.”
Oh my! Poor bastard has to sell his yacht. That’s not fair!
And so it starts. Pretty soon we will be approving tax vuts for those poor folks in Wall street that are unable to fill the gas tank in their bentleys due to the credit card being called on by the issuing bank. Oh the humanity.
Wait a sec, didn’t that already happen in 1981 or so?
well, IMB reports tomorrow morning. that oughta be interesting.
wonder if/when AHM starts trading again…
They’ll be in the pinks baby!
If the market holds these gains and AHM doesn’t re-open before the close you’ve put a lot of downside risk back in the market. Mr. Market at 5% cheaper this week now feels like the same relative valuation as last week, not particularly oversold with today’s action - it doesn’t look like the shorts can be squeezed easily here, with everybody aware that shoes are likely to be dropped.
“U.S. foreclosures rose 58 percent in the first half of 2007 from a year earlier, led by California and Florida, as more homeowners fell behind on their monthly mortgage payments, RealtyTrac Inc. said.”
“The company for the first time reported on what it calls ‘unique addresses,’ or properties that have had at least one foreclosure- related legal filing. In previous reports, RealtyTrac had only reported the number of legal filings, which could have resulted in properties being double and triple counted.”
Are they now comparing apples to oranges??? I.e. if they previously reported ‘legal filings’, which resulted in the double and triple counting of some foreclosed properties, and are now recording ‘unique addresses’, which counts a foreclosed property only once, than the 58% increase in unique property foreclosures may be materially understated (i.e. the % increase in foreclosures may really be 100 - 150% + ???)
No, they are releasing two different numbers. The blob of filings that is up 58%, and a new number with no YOY comparisons. The new unique address number won’t be used for YOY comparisons until next year.
Well this SOUNDS like a better number to be looking at anyway.
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From Raymond James’ Jeff Saut:
“Liquidity is a coward; when you need her most she runs away and hides!”
July 30, 2007
I did a plethora of media events last week. The reason is simple; the media is “long” volatility, meaning that when the markets swing wildly (aka volatility), the media’s “juices” flow more rapidly. For the past few years I have often spoken about volatility, suggesting that it was under-priced, for as surely as night follows day, periods of low volatility are followed by periods of increased volatility. For the most part those words fell on deaf ears as memories are short on the Street of Dreams. And why not, because except for brief declines in May / June 2006, and again in February / March 2007, the major market indices have traveled higher with very little volatility. Such a low volatility skein left participants imbibed with the sense that every decline would be short/shallow and therefore was for buying. And that “short and shallow” cry was heard from 99% of the media’s pundits late last week. We, on the other hand, are not so sure.
It is refreshing to see a few truthful economic blurbs lately. We need many more of them to counter the criminally insane, bong hitting, koolade shot drinking orgy of supply side stupidity by Cocaine Larry Kudlow and his cast of gangsters (Art Laffer) every afternoon.
Goldilocks (PPT) to the rescuuuuuuuuuuuueeeeee!!!
Dow up 85 points… sheeple, meet shears!
Goldilocks has eaten her porridge, is taking her nap, and the 3 bears are on their way back home.
Who is pumping the market? This is just nuts.
The market can’t go down every day. If it went down 1% per day, it would be at 37% of its current value in 100 trading days, 14% in a year.
Hope springs eternal …
And for most longs it gives them a chance to get out. Unfortunately many will believe they will have to pay too much in taxes and not sell their stock. When in living memory has the tax bracket for capital gains been lower? So they will ride the market down, 5%, and then another 5% and then another 5% and when the market is down 30% they panic sell. But they won’t have to pay taxes!
I got 8%. Raised .99 to the 250th power. I get 14% with just 195 trading days. How did you do your calculation?
Simple. Excel cell A1 enter “100″ cell A2 enter “=.99*A1″. Then fill down. Trading day n = cell A(n+1).
Polly - same thing. I just roughed 200 to a year’s worth of trading days. More like 240. So your estimate is better. The series is losing about 63% every 100 days. The series does converge to 0, but slowly.
Well, people are still putting money into 401(k) and a lot of that money comes in at/near the end of the month. Don’t expect a down day EVERY day until the recession really gets going. Expect cop for the next few months.
I’ll put $5000 into an IRA in January of 2008, my matching 401k will be somewhere between $3500 and $4000 and that will be in January or February. then I’ll contribute $16,000 from the first week of January. Done so every year since 1989 - and eagerly!
This one from FBR may have already been discussed, but it is worth pondering. They bought a subprime outlet in 2005 (First NLC) for $ 88 million, and now they are giving most of it back + $15 million in cash + $3 million in liability coverage + holding onto a stinking $250 million pile of subprime paper. What a deal, eh?
I love how they headline it: Sun Capitols Buys a stake…yea, more like is paid to take out the garbage.
bizjournals.com
Sun Capital affiliate buys stake in subprime lender
Friday July 27, 2:48 pm ET
Friedman, Billings, Ramsey Group has agreed to sell majority stake of its subprime mortgage subsidiary to an affiliate of Sun Capital Partners.
Sun Capital is to invest $60 million and FBR Group will contribute $15 million to help recapitalize Boca Raton-based mortgage banker First NLC Financial Services. FBR Group also is providing a $3 million indemnification to Sun Capital for certain potential liabilities, and will retain ownership of about $250 million worth of conforming and non-conforming mortgages recently originated by First NLC that are expected to be sold or securitized during this quarter.
The Arlington, Va.-based banking, brokerage, asset management and private client services firm bought NLC from Sun Capital in 2005 for $88 million in cash and stock.
don’t know if this has been posted.
A monoline meltdown?
Jul 26th 2007 | NEW YORK
From The Economist print edition
A hedge fund stalks subprime’s next potential victim
AS AMERICA’s subprime-mortgage tempest spreads, Wall Street’s latest parlour game is to bet on who will be next to get caught in the storm. A fair few have placed their chips on the so-called monoline insurers, an obscure but important bunch who guarantee the timely repayment of bond principal and interest when the issuer defaults.
The two largest monolines, MBIA and Ambac, both started out in the 1970s as insurers of municipal bonds. In recent years, much of their growth has come in structured products, such as asset-backed bonds and the now infamous collateralised debt obligations (CDOs). The total outstanding amount of paper insured by monolines reached $3.3 trillion last year.
and the kicker- 150 times capital!
The industry’s tormentor-in-chief is William Ackman, who runs Pershing Square, a hedge fund. Mr Ackman has spent the last five years, no less, telling anyone who will listen that the monolines are doomed, with MBIA particularly vulnerable. He points to their massive leverage: outstanding guarantees amount to 150 times capital. He also questions MBIA’s “aggressive” accounting techniques. Earlier this year the company paid $75m to settle allegations that it used reinsurance contracts to conceal losses.
http://www.economist.com/finance/displaystory.cfm?story_id=9552987
Keep a close eye on MBIA and the other 3rd party insurers. If they go, all of the bonds they guaranteed will take an automatic ratings hit. BTW, the ABX index does not (by construction) include 3rd party insured bonds…
This reminds me. I sent my mutual fund management an e-mail asking how safe their money market is. I am still waiting for a reply after 2 weeks.
“IKB Deutsche Industriebank AG replaced its CEO and said profit will be ’significantly’ lower than forecast, hit by the U.S. subprime mortgage rout that it said 10 days ago would not affect it….”
Like buoys bodies are surfacing across the seas of suspended disbelief and invincibility. Yet, despite the salted evidence, I cannot believe it.
Ben,
I’ve been sort of bored with most of the housing news posted this month but this posting marks a red letter day. The implications herein are as potent as they get. Thanks for’ making my day’ !!
Getting a little jaded are we?
–
Germans are always afraid of “The Return of Inflation”!
“Meanwhile central banks try to avoid deflation at all costs.”
Yes, but we know exactly what that cost is – PUSHING more and more Consumption Debt. This directly pushes the prices up, other things being equal. The $10Tr question for the US is: How much more Consumption Debt can be pushed? My forecast is that the Consumption Debt in the US would peak during 2007 and that would directly lead to falling “aggregate demand.” (Consumption Debt has been growing faster than the economy during this recovery and the economic growth needs aggregate demand to grow). You can guess what it would do to inflation rate when demand starts to fall. The demand for the biggest ticket item – Homes – is already falling
Jas
——————————————————
The Return of Inflation
July 24, 2007
By Joachim Fels, Elga Bartsch; [Morgan Stanley’s German Economic Team]
Inflation will likely make more of a comeback in the coming years than markets currently are prepared for. Our view is based on a broad analysis covering the historical and the global perspective, the secular and cyclical drivers of inflation, and a number of special factors. Against this backdrop we eventually expect ten-year bond yields to climb above 6% in the US and above 5.5% in the euro area, led by higher inflation expectations.
Starting with the historical review covering nearly 200 years of inflation data, we find that a protracted drift in price level is a relatively new phenomenon since the move to a pure paper money standard. Prior the 1950s inflation tended to be followed by deflation, causing the price level to remain almost constant during the gold standard. Moreover, under the pure paper money standard, positive inflation shocks which result in an overshoot of the inflation target are not corrected subsequently. Meanwhile central banks try to avoid deflation at all costs.
…
well, maybe this comes from Germany because they have a lot of catching up to do in the great home price inflation game …
The way I read the numbers is 98% of people with poor credit, no down-payment, no equity etc. are still somehow hanging on to their dream house. Amazing! God bless America!
Nicely said
Slightly OT, I’m listening to plenty of dark music to prepare myself mentally for the near future. The Smiths and The Cure. A little Mazzy Star and Rachael Yamagata. Oh some Cruxshadows just to cheer up after that.
two words - Leonard Cohen >; )
And, for the classics, Blood on the Tracks.
“And, for the classics…”
After that intro, I was expecting maybe a Bach Fugue. Caught me off balance w/ Dylan.
engh… Cure is far too cheery. Cruxshadows are great, but other than “Marilyn my Bitterness” aren’t very dark. Try some hard-core industrial, like Combichrist. Their “What the fcuk is wrong with this tour”, promoting thier newest album “What the Fcuk is wrong with you people”, is rolling through PHX in Aug 10. I wouldn’t miss it.
Darrell
Cure is mostly for mood. Cruxshadows for lyrics - especially ‘Winterborn.’ I haven’t followed industrial in years - basically since Skinny Puppy, Front 242.
I kinda like Elvis Costello’s “Less Than Zero” for the near future.
Let the bodies hit the floor……WHHHHHOOOOOOSSSSSHHHHH
how about “Seasons in the Sun”. I nominate that depressing song for the anthem of the housing bubble
wait - i have the perfect music: the bitterness of - any pat benetar
I would say anything from Pink Floyd. The Cure is my second choice. Pink Floyd is the ultimate in dark, moody, and depressed.
Joy Division and subsequent New Order is even darker….shades of black, white and gray is all you hear.
Seems the past 8 months, investors and the like are acting as if these loans are a genie that just popped out of a bottle. No diligence for future performance predictions? Now, everyone suffers. No one paid attention to the sub prime loans with 7.0 margins and 5/2/5 caps; Truly, this wasn’t a secret. The american dream isn’t for the US to allow people to be put into these loans to lose their homes, financing options need to be made available or note modifications, let’s stop the foreclosures and keep people in their homes.
“let’s stop the foreclosures and keep people in their homes.”
Are you being sarcastic?
“Lets stop the foreclosures and keep people in their homes”.
Try convincing “the people” who have bought in the last 2-3 years to keep their homes when they have no equity in them. They dont want to keep their homes if there is zero equity. To them this was a big get rich scheme where they had to put down zip, zero, nada. Now that the home is nothing more than a alligator that has to be fed monthly with rising payments, it is easier for them to walk away.
I am still laughing at your comment by the way, Donna.
“The american dream isn’t for the US to allow people to be put into these loans to lose their homes, financing options need to be made available or note modifications, let’s stop the foreclosures and keep people in their homes.”
Lets double our taxes so that people who should have never bought houses, but did, can keep them.
Come on all you responsible people who didn’t fall for the greed machine, pony up for those that did…. we need to pay for their “American Dream”
why should I continue to make my mortgae payment fi others get off?
write off 50-100k for everybody!!!! free money!!!! … i’ll take it because that would pay off my loan entirely.
“investors and the like are acting as if these loans are a genie that just popped out of a bottle”
Rating agencies called them “AAA” products, so therefore there wasn’t any risk, right?
Just like Fair and Issacs’ FICO score gave lenders and investors the impression that “alt-a” and “prime” borrowers would never default.
Single point of failure on both counts. It’s all good.
Cautionary note to future generation of lenders: If you give too large a mortgage relative to a household’s income, then backload the repayment of principle with gimmicks like payment option features, they are likely to soon stop paying their mortgage, no matter how perfect their past VISA charge card account payment record happens to be.
Describe a note modification that makes a $500,000 home affordable to someone who makes $40,000 per year and borrowed 100%.
A 3% interest rate?
Are you asking the lender to take a $200,000+ loss on their loan for the sake of the borrower? This is what would happen with such a modification. How would this impact the bank’s ability to lend money to new lenders?
Ultimately, loan modifications will happen when they are a win-win solution for the lenders and borrowers. Foreclosure costs money, legal fees, lost interest during the process (including time to auction the home), and lost value due to the implied blight on the foreclosed home, and repair bills once the borrower/inhabitant no longer cares. If a modification will help save the bank money over foreclosure, and makes the borrower more able to make the payments, the modifications will happen.
Otherwise, the homes will be foreclosed, and the former occupants will be back where they should have been in the first place, living in a smaller, cheaper house, or renting.
and ultimately the taxpayer would foot the bill. if this happens, time to storm the bastille
The reason for the ongoing carnage isn’t excessive margins on adjustable loans. The problem was in the excessively low introductory rates: They masked the fact that even an adjustment to market interest rates would result in unsurmountable payment shock, because so much credit had been extended to people with so little income.
I suspect the extraordinary margin spreads of the “predatory” loans reflected a determination by the lenders that these overextended borrowers would almost certainly default — and so the margins were set high enough to squeeze every last dollar out of the borrowers before they succumbed to the inevitable.
The lenders were ultimately betting on home appreciation continuing, although none seemed to understand that such increases were a self-fulfilling prophesy.
Lowering underwriting standards=increasing the potential buyer pool=increasing demand=increasing prices=easy to convince yourself to lend higher LTV to worse credit. Rinse. Repeat.
Now we are in:
Tighten lending standards=decreasing the potential buyer pool=decreasing demand=decreasing prices=nervousness, and tightening lending standards to lower LTV, better borrowers. Rinse. Repeat.
A virtuous cycle becomes a vicious cycle. And it’s just starting to pick up steam.
I wonder when all this will drift over to the inflated China property market…If their skeletons in the closest come on the heels of what’s happening now, 2008 will be real interesting! :>
Chris a great question and not just China, but India, Thailand, Vietnam, Malaysia These countries’ incomes are growing at 10% annual clip. There is scads of moneys there. But there have been some really ugly property prices paid for residences that locals cannot possibly afford.
I know US citizens who were born in Asia (Chinese descent). They tell me this: The asians have a high savings rate. The ones who are in the United States are waiting patiently for interest rates to rise and real estate prices to fall. They will buy in cash.
Learn from them.
I dunno; I’ve seen a lot of heavily-Chinese areas in SoCal (Irvine, San Gabriel Valley) bubble up with the same stupid-credit money as the rest of them, and the Asians don’t seem immune from the “get mine now” impulse. Maybe there are a few old-school smart folks sitting on cash, but the younger generation seems to have adapted to California-style leveraged goldrushing with a vengeance. If they had any savings, they used them for downpayments on six Phoenix condos apiece.
Here’s another thing that’s being affected by the housing slowdown:
http://www.azstarnet.com/metro/193981
–
What Is Liquidity?
In pre-Revolutionary America it was free serving of alcohol (a liquid, of course) during election times. (In other places cash and other inducements have been used to secure election victories). Gen. Washington, while running for Virginia Assembly for the first time, refused to follow the practice because he was a man of principles. Predictably, he lost. Next time he ran he ordered the best whiskies and lots of it and he won handily. The “liquidity” was free flowing. Principles are hard to hold on to when power is at stake.
Today, when the President is up for re-election, or the Fed Chairman is up for re-appointment, the serving of liquidity takes the form of tax cuts and “emergency” Fed funds rate. This creates money via increases in debt (tax cuts are funded by Federal borrowing and artificially low rates allow private sector to borrow more all of which create mo money).
The liquidity is the money created by free-flowing debt courtesy of the Federal govt. and Federal Reserve – The Feds.
Jas
“IKB Deutsche Industriebank AG replaced its CEO and said profit will be ’significantly’ lower than forecast, hit by the U.S. subprime mortgage rout that it said 10 days ago would not affect it.”
Good, if you hadn’t been financing crazy lending in the US to make a quick buck then there would be no bubble. Betting on strawberry pickers paying off $750,000 houses was not such a great idea after all was it!
With everyone taking huge losses and the banks in particular, could this be the beginning of the end for all the REOs on the market with the yesterdays ‘wishing price’ still attached to the sign out front?
I’m thinking the banks are going to start moving the REOs for any price they can get.
Thoughts?
From cnn business:
“A hedge fund manager whose fund ran into trouble from the sell-off in securities backed by subprime mortgages is having to put his huge yacht up for sale, seeking $23.5 million.”
…
“Devaney told Money magazine this spring that despite problems that the loans cause for borrowers (subprime), the assets backed by them provided a good return for his fund.
Betting big on “idiot” loans
“The consumer has to be an idiot to take on those loans,” he said. “But it has been one of our best-performing investments.”
Yes, the consumers taking out those loans are idiots. The only greater fools are the ones financing those loans, right Devaney?
More to the point, the only greater fools happen to also be some of Devaney’s best customers.
The liquidity story is bigger than the housing story. Subprime loans begain failing in price due to rising defaults because housing prices began to decline. Originators of subpime mortgages go out of business. We are told that all is well, the problems in subprime mortgages are contained. CDOs backed by subprime mortgages become difficult to value, creating problems for investors and hedge funds and their lenders. Wall Street begins to worry about similar lending vehicles like CLOs for corporate junk credit. Tens of billions of dollars of junk corporate debt sales are deferred. CNBC commentators now say that the liquidity concerns are not affecting high grade credit. Okay, subprime mortgages and junk corporate are having liquidity problems. People, the problems are spreading, because the old saying that the problems are contained in subprime has already spread to junk corporate. The prices of junk corporate has not fallen out of bed like subprime mortgages, but we are on our way. Our entire economy is based on credit, so as its cost increases, or its availability is restricted, it is US corporate earnings and economic growth that will be contained.
The liquidity story is bigger than the housing story.
Well of course it is, since the housing bubble’s only the most obvious manifestation of a global credit bubble.
It looks like the junk credit market got a one day reprieve today. Giant hedge fund Citadel bought the failing portfolio of Sowood ($3 bil book value). No price was given but the fact that somebody was willing to buy was a bit of a relief. Adding to the relief rally was GM reporting that its GMAC finance unit’s earnings dropped “only” 63% instead of all the way to a loss. I’m going to look into the accounting for this since it seems too good to be true. Likely a temporary stay of execution for junk bonds.
http://www.thestreet.com/_yahoo/markets/marketfeatures/10371146.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA
BTW, Sowood was the fund that the NYT mentioned was down 10% YTD. This article says they had lost 50% before selling out to Citadel.
http://www.bloomberg.com/apps/news?pid=20601103&sid=aT31Y.pPjvAs&refer=us
Sowood is also interesting in that it’s manager Larson, used to run the Harvard endowment fund. Seems Harvard invested in Sowood when Larson left to start his hedge fund. Wonder how much Harvard lost?
HSBC forsees clamp on loans
By Jane Croft in London
Published: July 30 2007 10:37 | Last updated: July 30 2007 20:59
The chairman of HSBC on Monday said turmoil in the credit markets could blow away some of the “froth” in the market, with “covenant-lite” loans set to be curtailed, as the bank revealed record provisions for bad debts linked to the US subprime crisis.
Stephen Green said: “It is too early to tell if this is a temporary bout of indigestion or whether a whole new pricing structure will have established itself when people get back from their holidays . . . if it is the latter, some things that might have got done are not going to get done.”
There could be some tightening up in controversial areas such as covenant-lite loans – which carry few of the usual restrictions lenders place on borrowers. “You’d have thought the froth of the market will get blown off at least and part of the froth is covenant-lite, or zero covenant – which is often what it is.”
However, Mr Green said underlying world economic growth remained sound. “The real economy continues to remain remarkably robust. This is considerable distance from recession territory.
“There is still an enormous amount of liquidity chasing deployment – the Chinese reserves, the Middle Eastern reserves . . . there’s no obvious reason to believe liquidity is drying up or even under pressure.”
http://www.ft.com/cms/s/33ce37aa-3e7d-11dc-bfcf-0000779fd2ac,dwp_uuid=d355f29c-d238-11db-a7c0-000b5df10621.html
“‘The consumer has to be an idiot to take on those loans,’ he said. ‘But it has been one of our best-performing investments.’”
Too bad about the yacht, asshole.