Archive - Jan 30, 2010 - Story

This article has two weekend brainteasers. I don’t understand their significance fully. I know that human beings create beautiful delicate architectures to manage risk and they work imperfectly. Whether the motive is extinction avoidance, or to build a heaven out of hell, or eros playing off logos; creativity is the reason for beings. I enjoy studying the archaeology of risk mitigation.
Remember volatility first cracked a smile after October 1987, because sellers of equity puts became more afraid of jumps than they were before. Smiles and skews endure to this day, as classical tribute to persistence.
My point is that there are times when it really is different. This may be one of those times. Further, I’m not sure how to interpret these new things. Here are two open questions for the weekend related to some artifacts I found.

Following on yesterday's RealPoint January update on CMBX delinquencies, here is Lehman's most recent report on January whole loan and CMBX remittances. While CMBX 3 seems to have stopped the bleeding at least temporarily, the other vintages are happy to step in its place. Deterioration is also accelerating in non-CMBS whole loans.

Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not. - Eric Sprott

January is over, and while the stock market closed at its YTD lows, some corporate bond segments are still on fire. Below we present a complete heatmap for January bond price performance by subsector. Each issue is presented on a size relative basis, with the grayed text giving detailed information about any one specific issue, including corporate ticker, one month change, ISIN, Name, Rating, Outstanding, and last price (compared to Dec 31, 2009, red is lower, blue is higher).

This week's most relevant estimates and charts from Goldman Sachs:

On Earnings:

Our top-down EPS forecast of $76 and $90 for 2010 and 2011 reflect +33% and +20% growth, respectively. Our pre-provision and write-down EPS forecasts are $81 for 2010 and $91 for 2011. Bottom-up consensus forecasts a 38% increase in 2010 to $79, and a 21% increase in 2011 to $95.

On Valuation:

Top-down, the S&P 500 trades at an NTM P/E of 14.3X (13.4X on pre-provision EPS). Bottom-up, it trades at NTM P/E of 14.1X and LTM P/B of 2.3X