Archive - Mar 2010
The problems of aging and pensions were already challenging enough. Current attempts to buy short-term expansion with artificially low interest rates can only make the long-term problems greater than ever. Recent Treasury-bond auctions have seen fairly weak demand, forcing yields higher. Is this a sign of things to come?
With the world’s weakest major economy, Japan is certain to be the last country to raise interest rates. This is inciting big hedge funds to short yen to finance longs in every other corner of the financial markets. The world’s worst demographic outlook assures problems will only get worse. They’re not making Japanese any more. The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. Japan is at the top of the list. The Japanese long bond market, with a yield of 1.4%, is a disaster waiting to happen. (YCS).
Spin City - San Andreas: Are There Signs From The Bond And Swap Spread Markets That Government Debt Risks Will Derail The Expansion?Submitted by Tyler Durden on 03/31/2010 21:51 -0400
“Tremors”. A good way to describe the psyche of some investors right now is to imagine being a resident of San Francisco or Los Angeles. Everyone is extremely jittery about any sign of a tremor coming from the big fault lines; but as long as nothing happens, life goes on and things improve at a normal pace. In the case of the U.S., there are noticeable improvements which may be self-reinforcing: production, consumption (retail sales, vehicles), profits, inventories, delinquencies, confidence and possibly even employment. Even California tax collections appear to have bottomed. Equity and credit markets reflect these improvements, with YTD gains on target for our 2010 forecasts. But these improvements all lie close to the San Andreas fault lines of U.S. Treasury funding needs, Chinese demand for Treasuries, the end of Federal Reserve purchases, crowding out of private sector demand, rumors of a Moody’s downgrade of the United States, etc, etc. Rates generally rise at the end of a recession, so there’s nothing new in that. But there’s a point at which very high long term rates could derail the expansion. Let’s examine where the greatest concerns are coming from.
On top of the previously announced record delinquency rate for Fannie, here comes some even worse news out of commercial real estate, which together with record high downtown vacancy rates, should be enough to push all REITs to 1052 week highs tomorrow. RealPoint has just released its March CMBS delinquency data, according to which delinquencies hit an all time high 6%. Not to be ignored, according to TREPP this number is even worse, at nearly 8%, after the single biggest monthly spike in 30 day + delinquencies.
Borrowers have been making private mortgage insurance payments for many years. Now that the MIs face large losses, they have ramped up claim denials to 20-25%, up from virtually nothing two years ago. Borrowers will indirectly bear the cost for the MIs not honoring claims in the form of higher borrowing rates.
In a surprising move, the FRBNY has just released the holdings of Maiden Lane I, II and III. Some preliminary observations: ML 1, in addition to holding a boatload of CDOs, has quite a few Residential whole loans, a variety of single names CDS, of which the bulk is CMBX, AMBAC, MBIA, PMI, CDS on Commercial Real Estate, CDS on Munis, CDS on non-agency RMBS, CDS on Non-residential ABS, some treasuries, and just under $3 billion in Interest Rate Swaps. ML 2, as noted, contains $35 billion of Non-Agency MBS. It also contains $280 million in cash, held with a Goldman Sachs account. (GOLDMAN SACHS FIN SQ GOVT FS). ML 3 consists of a variety of CDOs whose notional value is given as $56 billion. Once again, the Fed parks its cash of $383 million in this account with Goldman Sachs.
The guy who may have crushed Greece's hopes for a slow and steady bond issuance strategy by rushing head over heels to raise as much as his underwriters promised him could be done, with the result being getting hit on just 39% of the €1 billion in the recent 12 year reopening, is former Goldman banker Petros Christodoulou, director of the Greek Public Debt Management office. Here he is an a Bloomberg TV interview conducted earlier.
Expect the other sovereigns and related domiciled banks that we have covered to follow suit within the next couple of quarters.
I can easily make the argument that a 40% gain in over a year implies strong momentum that is likely to continue. But I won't make that argument, and instead, I will just state that this appears to be what it is: another data point that doesn't provide too much clarity.
Is there just a little trepidation in Jan Hatzius' typing as he reconfirms his +275,000 Friday NFP Target?
"Our forecast of +275k for Friday's report on nonfarm payrolls is based on this premise (an underlying increase of 50k, including non-Census government, plus another 100k for a weather rebound and 125k for temporary Census hires). We have not changed this estimate but will keep it under review, as we always do, pending more information on hiring (Conference Board and Monster), claims, and the ISM's mfg employment index." -Jan Hatzius, Goldman Sachs
"As Nobel-prize winning physicist Richard Feynman observed, to call these numbers
“astronomical” would be to do astronomy a disservice: there are only hundreds of billions of
stars in the galaxy. “Economical” might be a better description. It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis
occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of
$1.5 trillion per year. The total market capitalisation of the largest global banks is currently only
around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting
banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite." Andrew Haldane, Executive Director Bank of England
Moody's Investors Service has today downgraded the deposit and debt ratings of five of the nine Moody's-rated Greek banks due to a weakening in the banks' stand-alone financial strength and anticipated additional pressures stemming from the country's challenging economic prospects in the foreseeable future. Today's rating actions were prompted by the country's weakening macroeconomic outlook and its expected impact on these banks' asset quality and earnings-generating capacity. Pressures on the macroeconomic fundamentals have been evident for the past year and are expected to intensify as the year unfolds, said Moody's.
Here is one reason why Europe, while doing everything it can to make it seem (politically) like a bailout of Greece is out of the question, is and will continue to do all in its power to prevent a domino effect within the PIIGS countries: actually make that 1.5 trillion reasons. According to the IMF, the total amount of foreign claims, in this case focusing on Southern Europe countries, better known as PIIGS, on European international banks is $1.54 trillion. And while many have claimed that Germany would stand to lose the most from an implosion in the European periphery, that is in fact not true true: with $781 billion, France has much more at stake than Germany, whose banks have "just" $522 billion in "Southern European" claims. And while the IMF cut German GDP forecasts in large part due to the country's exposure to Southern Europe, it appears that France is next on the chopping block.
We start in Fixed Income, the long bond future broke out the 115-19 resistance level yesterday late in the session, and gapped up this morning. Here technically as long as the gap is not filled and the bond does not trade below 115-21, the market should rally toward the channel resistance at 117-27/28. This is technically our preferred scenario following our buy recommendation last Friday. Conversely, should we be wrong and the market breaks below 115-21, the 115-00/114-19 should be a huge support zone (if 115 is convincingly broken on a daily close the next support is 111-25!). - Nic Lenoir
Ken Lewis Won't Settle Civil Charges With Cuomo, Bernanke And Paulson Will Likely Appear As Defense Witnesses In TrialSubmitted by Tyler Durden on 03/31/2010 14:01 -0400
Yet another development in the saga of Ken Lewis, which everyone seems to have mostly forgotten now, who as a reminder is being sued by NY AG Andrew Cuomo, was just broken by Charlie Gasparino who claims that the former head of BofA is refusing to settle and will instead likely go to trial. In his lawsuit Cuomo alleges that Lewis violated civil securities laws by not alerting shareholders to the enormity of the losses prior to their vote. The cherry on top: Bernanke and Paulson will likely end up as defense witnesses - we wonder if the two will invoke the 5th against self-incrimination.