Saturday, February 28, 2009
Friday, February 27, 2009
Thursday, February 26, 2009
I am estimating that total Treasury securities outstanding will close in on $12 trillion by September, 2009. Using a guess of 2% GDP growth, the debt to GDP ratio of the U.S. will jump to over 78.2%. For each dollar of debt added, GDP will climb only 19 cents.
Wednesday, February 25, 2009
Sales fell to an annualized rate of 4.49 million homes, an 11 year low. Distressed properties accounted for 45% of the volume.
I put the above graph together to illustrate the price declines that are needed to reduce inventory. The last 13 months of data is included. The X axis tracks the amount of months it would take to eliminate the inventory of existing homes (at the current sales pace). The Y axis is the average U.S. home price. The black line is a regression trend line.
The average inventory for the last year or so is 10.4 months. According to the most recent report, inventory has dropped to 9.4 months. Good, right? Well take a look at where prices had to fall to in order to achieve an inventory number that is a bit better than average. We are not out of the woods.
Tuesday, February 24, 2009
Of course, much like any useful tool, CDS can be mismanaged and lead to large losses. We will leave that for another discussion, for this post I want to focus on the current market for protection.
The above graph represent today's closing prices for protection on residential asset backed securities. The lower the price, the more expensive the protection. The indices are grouped by loan quality and securitization date (vintage). As you would expect, the higher rated indices are trading at higher prices. What is noteworthy is that 8 of the indices hit new lows today, indicating that risk appetite is weak.
The second graph represents prices for commercial mortgage backed securities. These indices work in the opposite fashion, the higher the level, the more expensive the protection. Three of these indices hit new highs today.
Although these prices are not perfect indicators of asset quality, they are some of the only resources available to market watchers. After all, there is only one bid.....the Federal Government.
In previous posts, I have mentioned (along with others in the industry, what is right is right) that the economy doesn't have any chance of recovery until home prices bottom. The home equity ATM is gone and the wealth effect has similarly dissolved. The later is important because it supported a low savings rate; why scrimp if my house is always moving higher? Not to mention multiple dwelling purchases and subsequent defaults by speculators, which have decimated states like Arizona, Florida and Nevada.
The data released today does not point to a bottom. On average, prices are down 19% in the last 12 months. The last time prices were this low was the Winter of 2003.
The above graph (click to expand) summarizes the last few years leading up to the current debacle. I took the year end total assets of the selected firms and divided that number by the common shareholder's equity. By 2007, 30 to 1 (meaning that the firm held $30 in assets per $1 in equity, the other $29 was debt) was the norm. This means that A 3% LOSS ON TOTAL ASSETS ELIMINATES THE SHAREHOLDER'S EQUITY.
Silver Falls Bank was closed last Friday, the only one the FDIC got around to shuttering. The bank was on the Bad Bank list and the loss percentage was sizable.
The Bad Bank list basically measures loans that are either significantly delinquent or in such bad shape that the bank isn't even counting the interest any more (non-accrual), relative to Tier 1 capital and loan loss reserves.
Remember, banks are roughly levered $10 to $1. A 10% loss on assets wipes these institutions out.
Thursday, February 19, 2009
Another terrible trading session for bank stocks today. The above table lists 55 bank holding companies that received TARP funds of at least $200 million. The total stock market capitalization of those companies is a little over $368 billion. The stock market capitalization of ExxonMobil is a hair over $359 billion. Would you want virtually the entire banking system or a whole bunch of oil?
Last Sunday, I indicated that equity prices had some considerable room to fall. Please be cautious. Some companies that may seem like good prospects could have hidden pitfalls. For example, H&R Block owns a bank that has a rising number of bad loans. You may remember that the company lends people money based on anticipated tax refunds. Not only have their defaults risen, but there is a danger that they might discover a considerable amount of fraudulent loans. Almost two years ago, Pacific Capital Bancorp was forced to take a significant amount of losses because customers had presented false income and tax documents to qualify for loans.
Sunday, February 15, 2009
This has prompted another look at equity index levels:
My guess, 2009 earning for the S&P 500: $31.70
Average earnings yield for the S&P 500: 4.882%
S&P 500 Index level: 649.18
Dow Jones approximate equivalent: 6,200
This is a substantial drop from current levels: 827 and 7,850 respectively. Might they fall that much? Maybe, but the important thing here is not jump into the equity market without thinking about the earnings prospects of these companies. As I have mentioned in previous posts, GDP will have to fall dramatically to clear the credit market. We are not out of the woods yet.
Please click on the below graph to expand.
Friday, February 13, 2009
Thursday, February 12, 2009
2/3/09 - U.S. Senator (South Dakota) Mr. Thomas Daschle withdraws his name from consideration for the post of Secretary of the Department of Health & Human Services. Fun Fact: Aside from not liking to report income to the Internal Revenue Service, he became the nation's 1,776th senator when he was first elected in 1986.
2/3/09 - McKinsey & Co. partner Ms. Nancy Killefer withdraws her name from consideration for the post of Chief Performance Officer. Fun Fact: Aside from not liking to pay state unemployment tax, she was once a member of the IRS Oversight Board.
1/4/09 - New Mexico Governor Mr. William Richardson withdraws his name form consideration for the post of Secretary of Commerce. Fun Fact: Aside from allegedly handing out state contracts to those who donate to his political campaigns, he supported a state ban on cockfighting. In 2007, New Mexico became the 49th state to ban the contests (Louisiana followed in 2008).
Note: Despite failing to pay over $30,000 in federal taxes, Mr. Timothy Geithner was confirmed as the 75th Secretary of the Treasury. Fun Fact: Aside from not abiding by the rules set forth by the Department of the Treasury, he worked for Kissinger & Associates for 3 years and is a member of the Council on Foreign Relations.
Bankruptcy news abound today:
Filing - Charter Communications: majority owner is Paul Allen of Microsoft fame
Filing - Midway Games: famous for Mortal Kombat
Rumor - Sirius XM Satellite Radio considering filing: home of Howard Stern & Oprah
Update - Lyondell CDS/LCDS results from last week: 15.5 cents & 20.75 cents respectively (Lyondell debt is only worth 15.5 cents on the dollar or 20.75 cents on the dollar, depending on the type of borrowing)
There are 2 charts above, please click to expand.
Wednesday, February 11, 2009
BNP Paribas Securities Corp.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
Barclays Capital Inc.
HSBC Securities (
Cantor Fitzgerald & Co.
J. P. Morgan Securities Inc.
Citigroup Global Markets Inc.
Merrill Lynch Government Securities Inc.*
Credit Suisse Securities (
Mizuho Securities USA Inc.
Daiwa Securities America Inc.
Morgan Stanley & Co. Incorporated
Deutsche Bank Securities Inc.
UBS Securities LLC.
Dresdner Kleinwort Securities LLC
*It is anticipated that the two primary dealers will merge sometime in the first quarter of 2009.
Tuesday, February 10, 2009
Please click on the above table to expand.
- The stock market capitalization of the 4 largest bank holding companies totals about $214 billion
- The stock market capitalization of Google, Inc. is $113 billion
- The KBW Bank Index closed at 26.74 today
- The last time the Index traded around that level was January, 1995
It really is this simple: the banking system borrowed lots o' money and lost its bet. if a bank is levered 10 to 1, a 10% loan loss will cause it to collapse. Several institutions were levered 20 to 1, even 40 to 1. All that is left is to do the math. CDOs mimicked this levered profile in a nice, neat package for other types of accounts to buy.
The destruction of credit is painful, but the only cure. Bailing banks out only promotes retrenchment. Think about real GDP back at the year 2000 levels before any type of credit equilibrium is attained.
The fact that the government wants to foolishly maintain any stock market capitalization for these companies is a farce. Shareholders were the ones who reaped the outsized rewards, they should be the ones to suffer the pain. The taxpayer is the lone sucker in this, stuck with the bills.
This is eerily similar to the strategy that Japan followed years ago. They waited about 5 years before they finally gave in and forced banks to merge en masse or fold. Those 5 years cost their economy 20 years worth of expansion.
Saturday, February 7, 2009
Friday, February 6, 2009
In private conversations and blog posts, I've mentioned execution risk. It is not enough to have a good plan (not that the government has that or anything), implementation is just as important.
TARP...Lookin' Real Good
Watch Your Muni Portfolio
Commercial Real Estate Woes
Thursday, February 5, 2009
Weekly jobless claims were released today and provide every reason to think that the unemployment rate will soon climb to the 9% - 10% range. 626,000 initial claims were filed and continuing claims stood at 4,788,000.
These numbers are at almost 30 year highs both on an absolute and relative basis.
Monday, February 2, 2009
-- The Federal Reserve System holds $47.37 in assets for each dollar of capital
-- Their holdings of U.S. Treasury securities have decreased by $243 billion in 1 year