Posts Tagged ‘Credit Market’
Risk of Default at Large Financials
Thursday, November 6th, 2008
It appears that CDS rates at the largest US financials has fallen. Morgan Stanley and Goldman Sachs have the highest CDS prices while Wells Fargo and HSBC now have CDS prices below 100. These prices are indications of the cost to insure $10,000 of bond debt for 5 years.
These prices were much higher a few weeks ago, before TARP kicked in.
People who read this post also read these:
Tags: Banks, Brokers, CDS, Credit Market
Posted in Markets | No Comments »
Commodities Snapshot
Wednesday, November 5th, 2008
A snapshot view of commodities reveals that they have all experienced some mild recovery at the end of the month of October, as liqudation pressure caused by the deleveraging of hedge fund and bank balance sheets which wreaked havoc on markets during the month subsided. Its been little more than a week since TARP began deploying funds in a meaningful way. Also, another factor seems to have been the destabilization that was caused by the covering of short positions in Dollar/Yen carry trades that forced further liquidation in equity and commodity markets making October 2008 the worst month in 21 years. These conditions have been profoundly deflationary.
The following chart shows how as a result of high commodity prices the daily cost of living rose incrementally to a high of an additional cost per capita of $4.77. While the turmoil in commodity market has been terrible for investors, the turn has been beneficial to comsumers, who are now enjoying a $2.58 dividend off the resultant cheaper cost of living.
In the above chart we calculated the ‘08 price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) and multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers wallets this year. (Bespoke)
Volatility in commodities is sure to continue and their prices have still a long way to go before the upper limit of the current downtrend line is broken. Under present circumstances, if you consider the economic growth numbers for the US economy continue to show up in the negative GDP growth and the credit market volatility continues to reign on the markets’ parade, commodity prices could face more downward pressure.
Charts: Bespoke Investment Group
People who read this post also read these:
Tags: Banks, Carry Trade, Chart, Commodities, Credit, Credit Market, Economy, energy, GDP Growth, Gold, Markets, Natural Gas, Silver
Posted in Markets | No Comments »
Global Writedowns vs. Capital Raised
Tuesday, November 4th, 2008
According to Bloomberg data, capital raised now exceeds global writedowns, and this may be a strong signal for the market that the banking sector has rounded the corner on the credit market debacle. During the previous month capital raised was trailing writedowns by around 50%, but during the last month saw quite a substantial jump bringing the totals to Capital Raised $690-billion vs. Writedowns $684-billion.
Chart: Bespoke Investment Group
People who read this post also read these:
Tags: Chart, Credit, Credit Market
Posted in Gold, Markets | No Comments »
Hugh Hendry: Don’t Bank on the Bailout
Sunday, November 2nd, 2008
Hugh Hendry, the brash, outspoken, and eloquent CIO, Eclectica Asset Management was invited to host Channel 4’s Dispatches, a UK TV program - “Don’t Bank on a Bailout”- a production that aired on October 27, 2008 about the fallout from this years credit debacle which adversely affected the UK and the US. Hendry travels throughout the City Financial District and then Wall Street.
Hendry has been one of the harshest critics of the lack of regulation in credit markets.
The three segments total about 15 mins. Its a must see:
Hugh Hendry, Part 1, Dispatches: Don’t Bank on the Bailout
Hugh Hendry, Part 2, Dispatches: Don’t Bank on the Bailout
Hugh Hendry, Part 3, Dispatches: Don’t Bank on the Bailout
People who read this post also read these:
Tags: Credit, Credit Market, Hugh Hendry, Markets, UK, Value
Posted in Markets | No Comments »
Commodity Snapshot
Sunday, October 26th, 2008
Judging by the way that commodities prices have literally been “drawn and quartered” since July, its obvious that the market has been forced into liquidation by the massive unwinding or rather de-levering caused by the near failure in the credit market, and the assumption of debt by governments and central banks around the world.
Gold, notably, has traded lower during this anomalous selling-spree, even though it has long been regarded to be the real asset choice of those wanting to protect against financial risk. Perhaps its simply either that gold is highly liquid at a time of great need and is being sold off, or there has been a substantial amount of central bank intervention by way of shorting gold in the futures market. Either way, given the sheer amount of money supply growth, by contrast, gold is very cheap. Which brings us to platinum. Take a look at these charts:
Platinum, which is 30X rarer than gold closed at $793, only $83 premium to the price of gold. At peak earlier this year, platinum traded at a $1,300 premium to gold.
Oil is continuing to get cheaper. OPEC held an emergency meeting, agreeing to cut production by 1.5 -million barrels. News of this had no effect on oil prices, not even an intermediate effect; it closed on Friday at $64.15. Which begs the question: Is OPEC really a cartel? They seemed content to sit back and watch gleefully as the price shot up to 147, but have been unable to do anything to stop its slide to current levels, not even a substantial cut in production. Or so it seems.
Is the imminent food crisis over? Are fears of oil shortages overwrought?
Right now, it looks like nobody cares. They just want their money out, and at any price.
As Warren Buffett has put it so eloquently in his recent NYTimes Op-Ed piece, Buy American. I am, “Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”
Charts: Bespoke Investment Group
People who read this post also read these:
Tags: Banks, Chart, Commodities, Credit, Credit Market, Dollar, EFU, energy, Gold, Oil Prices, Platinum, Silver
Posted in Agriculture, China, Commodities, Credit Markets, Crude Oil, Economy, Emerging Markets, Gold, Markets, Oil & Gas, energy, inflation | No Comments »
Counterparty Risk Easing: CDS Spreads Decline
Wednesday, October 22nd, 2008
According to BCA Research, CDS spreads declined sharply last week, further indicating that normalization of inter-bank lending could develop. CDS spreads tend to lead the corporate bond market, where high yield spreads have recently reached record levels. A reduction in corporate debt spreads in general would come as a relief as the thawing of credit markets is highly aniticipated as a sign that bailout efforts are working.
The BCA chart features the CDS and corporate debt spreads of bank issues only versus the 10 year treasury and policy rate expectations, which indicate spreads on bank debt recently hit an alll time high of around 600 and have only recently pulled back, but slightly.
The Fed will have to provide more assurance that policy rates will remain low, as a recent uptick in the 10 year treasury yield has offset some of the reduction in spreads.
BCA adds that bailout efforts need to proceed to ensure that the banking system starts functioning again.
People who read this post also read these:
Tags: CDS, Chart, Credit, Credit Market, Fed, Markets, spreads
Posted in Markets | No Comments »
Donald Coxe: Homeicide: The Crime of the Century
Monday, October 13th, 2008
Donald Coxe, Chief Investment Strategist, BMO Capital Markets, has published his latest issue (October 8) of Basic Points, titled “Homeicide: The Crime of the Century.” Given the release date of this issue, its interesting to see how timely his calls to action are.
Particularly, we would highlight Coxe’s call to reduce general equity exposure further, prior to what was one of the worst weeks ever (last week), and to not wait too long to buy agricultural stocks.
Columbus Day 2008 will go down in the history books as the single-biggest one day rally since 1933, the Dow rising 936 pts (its biggest one day point closing ever, and fifth largest %-age closing) . This rally followed the US government’s announcement that it would take an equity stake in the banking sector, by injecting $250-billion into the sector.
Its still early though, and as Coxe says, this is likely a “Mama Bear.” Question is, is this a Mini-Mama Bear (like late1980’s or late 1990’s) or a Big Mama (like 1930’s). In the full text of Basic Points, a must read, Mr. Coxe explains himself fully.
Here, we summarize his recommendations:
- Recommended exposure to equities is 46% depending on investor’s overall portfolio and risk tolerance, and close to absolute minimum equity exposure of 40%. Cash is currently at 20%, the maximum. (nice call considering the following week was one of the worst weeks ever in the market)
- Long term investors should not wait too long to choose among the heavily battered commodity stocks. Specifically, the best companies the world has to offer, relative to the world economy, competitiveness, management, cash flows, and balance sheets. Many may now be bought at a discount to their reserves in the ground, without taking into account balance sheet assets.
- Agricultural stocks have been savaged. All it would take is one “medium-sized crop failure” to mark the return of the global food crisis. A handful of very important companies have the means and ability to make the difference of assisting in the fulfillment of the protein demands of a billion people escaping the rice bowl and bread diet.
- For the time being, their lower stock prices prevents them from over-expanding or over-producing, which means their profits will end up being even higher in the super-cycle.
- Interest rates are sharply lower, thanks to short covering in the dollar, and collapse of stock prices, which has forced asset reallocation. This will soften the blow to the mortgagees facing potential foreclosure and not be so ghastly, as predicted by gloomy forecasters.
- Commodity prices fall during recession, but the real value of them does not. Small under-capitalized producers will be devastated in a recession, making them easy pickings for the larger ones when clarity returns in the market.
- Gold and Gold-mining shares remain an effective way to reduce “endogenous” risk in an equity portfolio. Although inflation will recede for a short while, the sheer size of the economic stimulus (so-called printed money) means gold could move to new highs.
- The downward movement of commodity prices has been far more severe than we expected. We should have warned clients to the rapid deterioration in the fundamentals in the last Basic Points. On Sep. 19 conference call, we advised a significant reduction in equity exposure to energy and base metals, in favour of the precious metals. These rebalancings should be of some consolation to investors in the volatile period ahead.
- The size and complexity of the credit market created in the final days of the bank mania, and the scale of deleveraging has made measuring overall risk unknowable. The Lehman failure means huge losses and years of litigation. Those assets were either sold or still overhang the market. Never before have so many colluded to behave so badly. Our doubts remain their malefactions have created a really big bear market, but we’ll probably know within weeks.
Thank you Mr. Coxe.
The complete report is available here.
People who read this post also read these:
Tags: Basic Points, BMO, BMO Capital Markets, Credit, Credit Market, DOG, Dollar, Donald Coxe, Economy, energy, Gold, inflation, interest rates, Markets, Metals, Mining, Mortgage, precious metals, Recession, Value
Posted in Markets | No Comments »
Interest Rates Cut by 0.50% Around World
Wednesday, October 8th, 2008
Key Central Banks around the globe have announced a concerted cutting of interest rates, by 0.50%, this morning, in an historic moment of cooperation, to stem the tide of the global credit market’s woes.
The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Sweden, and the United Arab Emirates have all cut key lending rates by 50 bps or 0.5 percent.
The Bank of England also announced that it would partially nationalize the country’s banking system by investing $90-billion in some of its banks.
In China, the People’s Bank has cut its key rate by a commensurate 27 basis points, and the Bank of Japan whose key rate is only 0.5% did not cut, but is lending “strong support” to the other central banks’ moves.
In identical statements, the Fed, ECB, and Bank of England, explained that inflationary concerns have moderated, and the worsening financial crisis had “augmented the downside risks to growth.”
Trichet, the ECB’s Chair, very modestly stated that “inflation is moderating.” Critics have argued that the ECB has been too slow and looking in the rear view mirror too long, to do anything meaningful for the European economy, and at the expense of the financial stability of European businesses. Others argued that while the move is very welcome, it may be too little, too late.
Euro and Sterling both gained on the announcement, while the price of gold fell.
Equity markets in Europe rebounded from intraday lows on the hope that this monetary action would help banks and consumer stocks.
Pre-Opening trading in index futures indicate a strong opening for US markets following the announcements.
Key Rates (post-cut)
- US - 1.50%
- Canada - 2.50%
- ECB - 3.75%
- UK - 4.5%
- Sweden - 4.25%
- China - 6.93%
People who read this post also read these:
Tags: Banks, Canada, China, Credit, Credit Market, ECB, Economy, Euro, Fed, Federal Reserve, Gold, inflation, interest rates, Japan, Markets, Sweden, Trading, UK
Posted in Markets | 1 Comment »
European Credit Crisis Deepens Global Selloff
Tuesday, October 7th, 2008
Ongoing credit market turmoil and a rapidly deteriorating economic outlook have hit global equities very hard.
Ongoing credit crunch worries and evidence of resultant effects on the global economy are diminishing the remnants of confidence among investors. Investors are fleeing all risk assets indiscriminately, moving into safe havens such as cash and government securities. Widening concerns of global bank failures continue (regardless of last week’s approval of the U.S. TARP program, now anti-climactic), bringing about runs on banks in several countries and preventing financial institutions from lending to one another.
Germany and Denmark announced guarantees on all private deposits following Ireland’s first-mover decision last week. Looks like we’ll have to wait for Europe to come to some unified solution such as a concerted bailout, and some nationalization of the banking sector in some of the larger markets.
Source: BCA Research, October 7, 2008
People who read this post also read these:
Tags: Banks, Credit, Credit Crisis, Credit Market, Economy, energy, Euro, Germany, Markets
Posted in Markets | No Comments »
Bailout Failure: Voters Rescued
Tuesday, September 30th, 2008
Perhaps the biggest problem with the credit market debacle is that Main Street doesn’t get it. Literally. Try explaining the credit market to the average guy.
The “TARP bailout” is being billed as a Main Street rescue, by Henry Paulson, et al. If you look at the situation realistically, Wall Street has already fallen. If you were Rip Van Winkle and you fell asleep for a year, while the US government tried to bailout Wall Street, you’d be wondering, what happened to all the banks that disappeared, or were bought up as of September 26, 2008. What was the point?
Add to this now Wachovia (now Citigroup), and the $700-billion TARP bill itself, as of September 29, 2008.
While Congress was voting against the credit market bailout yesterday, the market panicked and gave up $1.3-trillion.
Ironically, the folks who make the laws in America are not Wall Streeters, and are having the same difficulty as Main Streeters in understanding how the credit market works. How can you expect US Congressmen to vote on something they do not understand?
What is a credit default swap? Alt-A Securities? The Discount Window?
The failure appears to be an inability to “sell” Main Street on this bailout deal. The average guy doesn’t get “Wall Street,” and is wondering why they are going to get stuck with the bills that this bailout will generate.
What happens when you can’t refinance your mortgage, when you can’t withdraw cash from an ATM, when your employer can’t pay your salary, or the buyer of your home can’t secure financing, or your business is unable to extend credit to customers, or get credit from suppliers?
Wall Street, Ben Bernanke, and Henry Paulson are going to have to a better job to get an agreement on a “rescue package” to lawmakers, that the lawmakers can understand and pass on. Main Street still doesn’t get why it has to pay for the mistakes of others, and they don’t get yet how close the credit system is to imploding.
For now it appears that Congress has rescued voters. From what, though?
People who read this post also read these:
Tags: Banks, Bernanke, Citigroup, Credit, Credit Market, Mortgage, Paulson
Posted in Markets | No Comments »
Is There a Bull Market Somewhere?
Wednesday, September 24th, 2008
Not likely, according to PIMCO’s Bill Gross. In his most recent Investment Outlook, Gross, reasons and opposes (for now) the idea that in the very different worlds of Louis Rukeyser, Jim Cramer, and Jim Grant, “There’s always a bull market somewhere!”
While he does agree that there are always stocks, bonds, and currencies that can be found to be going up, while markets are going down, Gross cautions:
So the lesson must be to go forth and find the bull market, wherever it is. Almost always – but NOT NOW, because in a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand. For the past several months our PIMCO Investment Committee blackboard has continued to display the following lesson plan:
What Happens During Delevering
- Risk spreads, liquidity spreads, volatility, term premiums – they all go up.
- Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.
- The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.
Essentially, Gross’ thesis is that as the GSEs, banks, investment banks and global hedge funds delever their balance sheets, they also lower the prices of all securities that can be arbitraged within the marketplace.
The 10% year over year decline in prices has not been witnessed since the great depression, and that is a red flag.
a 10% aggregate asset price decline does more than make us all 10% less wealthy. Because many of these assets are leveraged and margined, the more they decline, the more frequent and frenzied the margin calls, and if the additional cash flow is not provided, not only an asset liquidation but a debt liquidation follows. It is the debt liquidation that potentially turns a stagnant/recessionary economy into something much worse.
This rare event of systematic debt liquidation is the central issue in both the US and globally. If central bankers are unable to take effective measures, the campfire could turn into a forest fire, and a mild asset bear market could turn into a destructive financial tsunami. Gross points out that even they and their SWF and central bank counterparts who have been doing their part to stem the tide, and in some cases bought into debt issues too early, only to see those issues now priced “underwater,” are now reluctant to make additional commitments.
Paulson and Bernanke have consulted PIMCO regularly throughout the credit market debacle, and have apparently acted on some of that advice as well as that of others like Pershing Square’s Bill Ackman, who floated a Frannie bailout plan prior to the Fed’s that was eerily similar.
Paul McCulley stated in late July, that the only thing that was viable given the delevering of the market that was well underway, was for government to lever up its balance sheet, much the way it is proposing to this week, with the $700-billion TARP plan.
common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions.
Gross concludes:
Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise.
(note: these ideas were published well before the Fed/Treasury realized the need for a far reaching solution)
Is there a bull market somewhere?
There is, but those assets are “rare as diamonds, as opposed to grains of sand,” according to Bill Gross.
Investment Outlook, Bill Gross, September 2008
Source: PIMCO
People who read this post also read these:
Tags: Banks, Bernanke, Bill Gross, Chart, Credit, Credit Market, Economy, Fed, Grain, GSE, liquidity, Markets, Paul McCulley, Paulson, PIMCO, Recession, spreads, Thesis, UK, Water
Posted in Markets | No Comments »
Highs and Lows of the Week
Friday, September 19th, 2008
The following chart shows how the ten sectors of the S&P 500 performed this week in the context of the government’s credit market intervention. Only energy (on oil’s price recovery) and financials (on bailout) made progress while eveything else was down.
It was a crazy week in stocks too. Merrill Lynch (MER) was the best performer on news that it was being acquired by Bank of America (BAC) and AIG was the worst performing stock on news that it would receive a two-year $85-billon loan from taxpayers.
Charts: Bespoke Investment Group
People who read this post also read these:
Tags: Chart, Credit, Credit Market, energy, Financials, Miscellaneous, S&P 500
Posted in Markets, inflation | No Comments »
Ackman Spares Lehman, Sounds Off on “Frannie”
Friday, September 12th, 2008
Make sure you watch this interview from September 10, 2008, when Bill Ackman guest hosted CNBC’s Squawk Box following the Frannie Bailout:
William Ackman, activist-Hedge Fund Manager of Pershing Square Capital Management, appearing on CNBC’s ‘Squawk Box’ expressed compassion for Lehman’s woes, stating that they had been picked on enough. He has been a big winner in this year’s credit market debacle, having been short Freddie and Fannie paper and investing in credit default swaps in both throughout the turmoil, as well as being short Lehman Bros., via put options, more recently.
Pershing bought put options on Lehman as a market hedge rather than a bet against the company.
Ackman has been outspoken critic, crusader, and speculator, putting his neck and reputation on the line, while blowing the whistle on the subprime mortgage, and credit default swap mess at the monolines and banks. We have followed Ackman’s views and actions during the “Nightmare on Wall Street.” Seems only a few people have wanted to listen while guys like Ackman and GreenLight Capital’s David Einhorn, have gone against the grain of those who claimed the “end of the crisis was in sight”, or that we had “rounded the corner on the problem.”
The pair have been vilified at times for outing discrepancies in moneycenter bank financial reporting, as hundreds of billions of dollars were bring written down.
Watch this video from June 5, 2008, where Ackman and Einhorn make a rare appearance together on CNBC’s Squawk Box.
The “Frannie” Bailout was also discussed. Earlier this year, Ackman proposed a solution for Freddie Mac and Fannie Mae that was strikingly similar solution to the government’s bailout plan, with a few differences.
Ackman used his hour on “Squawk Box” to also sound off about federal regulators’ seizure of Fannie Mae and Freddie Mac. While he praised regulators’ move to look beyond financial statements in determining Fannie’s and Freddie’s solvency, he said the bailout is only a temporary solution, which he said was reflected in the market’s extreme volatility over the past two days. He said where the regulators went wrong is that the restructuring involves the government investment taking junior status to an insolvent capital structure. He added that the “equity is deeply out of the money” because Fannie’s and Freddie’s assets are not greater than their liabilities. He reiterated his plan to eliminate subordinate debt at the mortgage intermediaries and convert some portion of the senior debt to equity, creating for solvency.
Ackman took his plans for Freddie and Fannie a step further, calling for a merged “Super GSE”, which CNBC’s Carl Quintanilla coined “Frannie.” Ackman said merging the mortgage giants would create economies of scale and improve their liquidity. And where would Frannie live? Ackman proposed Frannie move out of the Beltway and onto Wall Street in close proximity to the major investment houses where it could potentially poach talent.
Ackman has not only been a recipient of winfalls from the fallout in financials, he has also been incredibly successful on the long side of the market. Ackman is reported to have earned a $600-million gain this week, resulting from his investment in Longs Drug Stores by CVS Caremark. In the following video segment from September 10, 2008, Ackman, who makes a point of saying that he “rarely talks about stock recommendations,” discusses what he deems instead to be an “interesting opportunity.” Make sure you watch this; its very interesting.
Ackman also advised investors to go long on Longs Drug Stores, which had agreed to be acquired by CVS Caremark Corp. for $71.50 per share, or $2.9 billion, including debt just a week after Ackman filed a 13D with Longs disclosing that he had purchased a roughly 8.8% stake in Longs in common stock between the end of June and the end of July, paying between $40.47 and $45.92 per share and boosted his stake in the company to 23.6% through total return swap arrangements.
If you haven’t seen these interviews, make sure you do. They’re highly informative.
People who read this post also read these:
Tags: Banks, Credit, Credit Market, Dollar, energy, Fannie Mae, Fed, Financials, Freddie Mac, Grain, GSE, liquidity, Mining, Mortgage, Value, Video
Posted in Markets | No Comments »
PIMCO Co-CEO: When Markets Collide
Sunday, August 31st, 2008
About a month ago, Charlie Rose interviewed PIMCO’s Mohamed El Erian. El Erian is one of the country’s most successful money managers. He’s the co-CEO of the Pacific Investment Management Company, better known as PIMCO which oversees more than 829 billion dollars. He previously led Harvard University’s endowment to substantial returns on investment. In the interview, which is available below, Charlie Rose speaks to him about his new book “When Markets Collide” and how he sees the global economy today.
View Part 1, Click Play
View Part 2, Click Play
View Part 3, Click Play
People who read this post also read these:
Tags: Credit Market, Derivatives, El-Erian, PIMCO
Posted in Banks, China, Credit Markets, Economy, Emerging Markets, Financials, Fixed Income, Gold, India, Investment Strategy, Markets, Monetary Policy | No Comments »
Whitney: Credit Crisis Will Run Into 2009
Wednesday, May 28th, 2008
Liz Moyer, Forbes
Bank analyst Meredith Whitney says the credit crisis will extend well into 2009, if not beyond. This means more pressure on financial stocks and bank balance sheets; banks have added $25 billion to loss reserves so far, but face mounting consumer credit losses in a second wave of the crisis that some bank executives have acknowledged will be worse than the first, which has cost hundreds of billions of dollars in write-downs and losses.
Wall Street’s originate-to-distribute model, designed to mitigate risk by spreading it around, actually exacerbated those risks. It encouraged banks to loosen lending standards because more loan volume meant higher profits; then it led to over-leverage, and finally to complacency. More and more paper dollars were created for trading on the assumption that housing prices would always go up. The first wave of the crisis affected trading books, but the second will hit lending. As long as housing values were rising, borrowers could refinance in perpetuity to avoid default. Losses mounted when the refinancing option disappeared. Banks relied too heavily on the securitization markets to boost lending to consumers, particularly in the form of mortgages.
In time, some lending will return, but the sky-high revenues of recent years will be hard to reclaim, says Whitney. The banking sector’s pullback in lending will cause further painful losses. Whitney believes banks will have to reserve an additional $170 billion through the end of next year just to keep up with estimated loan losses. “New and unforeseen strains on consumer liquidity will push more consumers into precarious credit positions and cause consumer credit losses to be far worse than what is currently estimated, even by the most draconian of investors,” Whitney says.
http://www.forbes.com/2008/05/20/whitney-banks-credit-biz-wall-cx_lm_0520banks_print.html
Hat Tip: BMS Inc.
People who read this post also read these:
Tags: Banks, CIBC, Credit Crisis, Credit Market, Economy, Markets, Meredith Whitney, Oppenheimer
Posted in Credit Markets, Economy, Financials, Markets | No Comments »
Moody’s ‘AAA’ Mistake
Wednesday, May 21st, 2008
FT Alphaville exclusive: Moody’s error gave top ratings to debt products
Moody’s awarded incorrect triple A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, an Financial Times investigation has discovered.
Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.
News of the coding error comes as ratings agencies are under pressure from regulators and governments, who see failings in the rating of complex structured debt as an integral part of the financial crisis. While coding errors do occur there is no record of one being so significant.
Moody’s said it was “conducting a thorough review” of the rating of the constant proportion debt obligations - derivative instruments conceived at the height of the credit bubble that appeared to promise investors very high returns with little risk. Moody’s is also reviewing what disclosure of the error was made.
The products were designed for institutional investors. In the recent credit market turmoil, those who still hold the products will have suffered some paper losses while others who have bailed out have lost up to 60 per cent of their investment.
On discovering the error early in 2007, Moody’s corrected the coding glitch and instituted methodology changes. One document seen by the FT says “the impact of our code issue after those improvements in the model is then reduced”. The products remained triple A until January this year when, amid general market declines, they were downgraded several notches.
In a statement to the FT, Moody’s said: “Moody’s regularly changes its analytical models and enhances its methodologies for a variety of reasons, including to reflect changing credit conditions and outlooks. In addition, Moody’s has adjusted its analytical models on the infrequent occasions that errors have been detected.
“However, it would be inconsistent with Moody’s analytical standards and company policies to change methodologies in an effort to mask errors. The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs. We are therefore conducting a thorough review of this matter.”
Credit ratings are hugely important within the financial system because many investors - such as pension funds, insurance companies and banks - use them as a yardstick either to restrict the kinds of products they buy, or to decide how much capital they need to hold against them.
The world’s other major credit agency, Standard and Poor’s, was the first to award triple A status to CPDOs but many investors require ratings from two agencies before they invest so the Moody’s involvement supplied that crucial second rating.
S&P stood by its ratings, saying: “Our model for rating CPDOs was developed independently and, like our other ratings models, was made widely available to the market. We continue to closely monitor the performance of these securities in light of the extreme volatility in CDS prices and may make further adjustments to our assumptions and rating opinions if we think that is appropriate.”
Related links: CPDOs expose ratings flaw at Moodys - FT.com
People who read this post also read these:
Tags: Credit Market, Economy, Fixed Income, Markets
Posted in Credit Markets, Economy, Fixed Income, Markets, inflation | No Comments »
Paul Volcker: The Mother of All Crises
Tuesday, April 15th, 2008
April 15, 2008 - Courtesy of Prieur du Plessis, Investment Postcards - The video clips below are must-see material recorded during former Fed chairman Paul Volcker’s address of last week to the Economic Club of New York on the credit crises and related matters.
Volcker, who headed up the Fed from 1979 to 1987, said the credit crisis is the “mother of all crises” and the modern financial system has “failed the test of the market-place”.
“The transient causes of extreme leveraging have been exposed by force of circumstance. The nation’s spending and consumption are being brought into line with our capacity to produce,” said Volker.
“The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded Central Banking principles and practices … What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return.”
When asked about the possibility of a dollar crisis, Mr. Volcker retorted, “Dollar crisis … you don’t have to predict it, you’re in it … Let me remind you that the dollar after all is a fiat currency backed only by the word and policies of our government, policies exemplified by an independent Central Bank committed to maintaining price stability.”
Please click the images below for the views of arguably the greatest ever Fed chairman.
Please click on the following links for the rest of Volcker’s speech: Part 2, Part 3, Part 4 and Part 5.
Hat tip: RemiG2006
People who read this post also read these:
Tags: Credit Market, Currency, Economy, Markets
Posted in Markets | No Comments »
John Embry: Credit Creation Mechanism Appears to be Broken
Sunday, April 13th, 2008
April 13, 2008 - In his latest article, Sprott Asset Management’s, John Embry assails the central banks for messing around with the system and interfering with the market for precious metals, in order to further their own hidden agendas. here are a couple of excerpts:
Make no mistake, there is a concerted effort to suppress the gold price. The central banks are worried about the message being sent by a sharply higher gold price while their bullion bank allies are agonizing over mounting losses on their outlandish short positions. All one has to do is observe what is going on in other commodity markets (oil, platinum, palladium,.etc.) to appreciate the extent to which the gold and silver prices are being restrained.
Subsequently, he adds that it now takes five dollars of credit to create a dollar of GDP growth.
In addition as economic growth cycles mature they require more and more credit creation to creat the same amount of GDP growth. it wasn’t that long ago that it took one dollar of credit creation to create a dollar of real GDP growth. Recently, it has taken five dollars of credit creation to create a dollar of real GPD growth.
This helps to explain the explosion in the ratio of outstanding debt to real GDP in the U.S., a figure that has reached levels never remotely approached before. In fact, we have experienced the worst credit excesses in living memory in this cycle. Now that the credit-creation mechanism appears to be broken, is it any wonder that the Fed is giving every impression of panic? Without sufficient credit creation at this juncture, the economy could simply implode.
Our guess was simply that there have been substantial gold sales by central banks as a result of the need to support the dollar. When the yen reached 96.4 yen/dollar all three major central banks intervened to put a floor under the dollar, or, rather, a cap on the yen. The fall of the US dollar was aggravating the credit market’s wound.
Simply put, no one can afford to have the dollar get so cheap that it hurts. Following the central bank intervention, gold’s price plummeted while the dollar recovered by 5 or 6% against the yen.
Both ideas are equally compelling. Both ideas serve to shed light on what is going on behind the scenes.
Here is a link to read the complete article from Investor’s Digest. We assure you, its worth reading.
Credit Creation Mechanism Appears to be Broken, John Embry, April 18, 2008
People who read this post also read these:
Tags: Commodities, Credit Market, Economy, Gold, Metals
Posted in Markets | No Comments »
Yen’s Strength [has been] profoundly negative for global markets
Thursday, March 27th, 2008
March 27, 2008 - Donald Dony, The Technical Speculator, offers the following explanation of how the strengthening of the yen to a twelve year high against the US dollar has had a profoundly negative effect on global markets, in the past and during the most recent 6-7 months. We would also add that while Mr. Dony does a great job of explaining this concept, he also points out in the present tense that as the cheap money is quickly evaporating, so is the global market.
Our sense is that the yen broke through par, a level (usd/yen<100) that required intervention (which came last week), primarily by the BoJ to maintain it at levels that are more supportive of Japan’s economy. For this reason, it may be that if the yen has reached a turning point, that a new round of carry trade in the yen could provide stimulus and/or support to global markets at these levels. Change that to evaporated, past tense.
Global equity traders had, for many years, a ready source of funds at almost no interest charge. Traders have been shorting the Yen and using the funds to purchase stocks, currencies and high-yielding securities around the world. However, as of mid-2007, that “free bank account” is becoming more and more costly. The Yen carry trade is starting to unwind with very negative results for stocks.
But what is the “Yen carry trade”? Simply put, it is borrowing at very