Posts Tagged ‘Fed’
Donald Coxe: Post US Election Analysis
Sunday, November 9th, 2008
Donald Coxe and his colleagues at BMO Harris provided their post-election views following the Obama victory:
Donald Coxe, Global Portfolio Strategist, BMO Financial Group
- Obama’s victory will lead to a “feel-good” attitude within America at a time when gloom and sourness have become excessive. That favours financial assets generally at a time that fall is moving into winter.
- Obama’s spending plans will be seen as economy-favourable with the nation in recession. Stocks should benefit near-term.
- Obama is fully committed to continuation of all the ethanol subsidies and tariffs that McCain opposed. That is good news for the reeling ethanol stocks that have been buffeted by falling oil prices and still-high corn prices.
- Obama has threatened to impose carbon taxes on coal-fired electrical generating plants.
- None of the candidates promised significant revisions to the extremely favourable royalty structure for mining on federally-owned properties, mostly in the West. That is important for Canadian gold miners operating in Nevada.
- He famously said that on his first day in the White House he would “call up the President of Canada to announce he was tearing up NAFTA.” We believe he won’t do that.
- Worldwide, the election of a new U.S. President with a change agenda will be greeted favourably. This should facilitate America’s dealings with other nations on such hot topics as Russian expansionism and response to Iranian nuclear weapons development.
Andrew Busch, BMO Capital Markets, Global FX Market Strategist
- Expect a U.S. stimulus package of $150 billion to be enacted and checks out the door by March with an impact on consumer spending by late April and May.
- Expect very expensive bond deals issuance to be done over the next three months with those issuing likely to only be high quality to get done and with high spreads to Treasuries. This should mean they get snapped up.
- There is going to be massive government bond issuance in 2009 across the globe to pay for bailouts, stimulus packages, and social spending. This means we should see a further steepening of the yield curve in 2009, but it won’t necessarily point to a big economic recovery like it has in the past.
Jack Ablin, Chief Investment Officer, Harris Private Bank
- Both an Obama victory and a Democrat-controlled Congress are currently factored into markets.
- When looking at Europe vs. U.S. price-to-sales comparisons, one can see the U.S. is beginning to trade like a “nationalized” country.
- Tax rates are expected to increase which will give an edge to municipal bonds.
- A move towards socialized medicine appears to be already discounted. In examining the valuation of U.S. vs. European pharmaceutical stocks, the U.S. valuation already incorporates nationalized health care.
- Large cap is set to outperform as small cap moves back to normal valuation.
Paul Taylor, Chief Investment Officer, BMO Harris Private Banking
- We are a long way away from a sustainable equity market rally. A sustainable equity market rally will only occur when it is clear that the spectre of a protracted, significant U.S. economic recession is not in sight.
- Leading economic indicators signal a meaningful U.S. and global economic recession. This will cause policymakers in Washington to focus attention on the economy as the number one priority.
- Investors should have a defensive strategy, with an overweight in Consumer Staples, Telecom, Utilities and underweight in Energy, Materials and Technology. This will be more appropriate until the spectre of recession is past.
- With Fed Funds at 1.0%, monetary policy will be impotent moving forward.
- A global economic recession is bearish for commodity based currencies (Canadian and Australian dollars) and is bullish for other currencies. The current “crisis of confidence” is bullish for the U.S. dollar due to its position of reserve currency.
Source: PR Newswire
People who read this post also read these:
Tags: Australia, BMO, BMO Capital Markets, Canada, Currency, Dollar, Donald Coxe, Economy, energy, Euro, Fed, Focus, Gold, Markets, Mining, Monetary Policy, Oil Prices, Recession, REW, Russia, spreads
Posted in Markets | No Comments »
Heebner and Holmes on Emerging Markets
Saturday, November 1st, 2008
Click image for video
Ken Heebner, CGM Funds, and Frank Holmes, US Global Investors, discuss emerging markets in the context of the Fed’s 50 bps rate cut last week. Both their remarks on the rate cut and emerging markets are noteworthy.
Ken Heebner, CGM Funds: “Well, the emerging market economies are going to continue to have long-term growth. Those are the markets down the most, they’re down 50, in some places 60 percent and long term they have a bright future. Even Jeremy Grantham, the mega… the bear, is saying they’re almost cheap enough for him to buy. … When he’s ready to buy something, it’s going to go up.”
Frank Holmes, US Global Investors: “Well, I do like the emerging markets and I think if you look at energy names like PetroChina, it’s been just devastated here in stock price and it has a huge upside to get back to basically a healthier equilibrium and P/E ratios. But remember that most of these emerging markets, unlike 10 years ago Erin, they have, like China has $2 trillion of U.S. dollars…so they have a huge (foreign reserve) surpluses to be able to reinvigorate their economies. …I totally agree with Ken, this is where growth opportunities lie.”
People who read this post also read these:
Tags: China, Dollar, Emerging Markets, energy, Fed, Frank Holmes, Markets, Silver, Video
Posted in Markets | No Comments »
Better To Be Late, Amid Credit Crises: Thomas Barrack, Jr.
Thursday, October 30th, 2008
Thomas J. Barrack Jr., billionaire and Founder of Colony Capital, which controls $39-billion in real estate assets, in his recent newsletter, “Is the world going to an [Extinction Level Event?” provides his assessment of the state of the markets, and shares the following:
Why the Banks Have Most Likely Not Hit Bottom
• Corporate earnings from most sectors will be weak and capex programs will be slashed.
• Hedge funds will continue to be tortured by redemptions and their interplay with banks was
incestuous.
• The effect of hedge funds pulling out of the market will chill many sources of corporate
finance - Redemptions are massive.
• Counterparty risk in the CDS market will remain a bit of a mystery.
> CDS was equally as bad at the plate as equity and debt players
> The governments infusion of equity collapsed the CDS spreads
• CDS payments and failures at levels that are unfathomable - watch Lehman reconciliations on
Tuesday, Oct. 21st.
• The housing market will remain anemic.
• Insurance companies, automakers, airlines and shippers are all in trouble.
• State and municipalities are also Fed borrowers.
• Corporate refinancings at $150 billion a quarter with no one to refinance.
• Massive margin calls on the titans of America which will cause collapse in the corporate
equities they own.
• Forced liquidations.
• LBO restructurings and covenant violations.
• No DIP financing for bankruptcies, only liquidations.Long-term Consequences
The good news is that all we care about at the moment is SURVIVAL. We need to fight every day to monitor and steward the best deals we can find — the ones we own. However, eventually we will need to examine the long-term effects of our triage.
• Huge inflationary pressures. Inevitable higher interest rates and taxes.
• Massive national debt and budget deficits.
• Are we deferring the pain like Japan did?
• $11.3 trillion national debt is really $55 trillion due to OBL (off balance-sheet liabilities).
• Implications of investment losses for pension funds and endowments?Bottom Line
The game is afoot and not over. Don’t panic and don’t be euphoric. The discoveries will be constant and unsettling. Fortunately, the world powers have committed to win it. Now we all have to figure out what exactly that means. Based upon our past experience at implementing bank takeovers and “distressed asset” management and dispositions, we suggest that we all buckle our seatbelts for a longer ride with lots of ups and downs before we arrive to safety.
From Bloomberg, October 10, 2008:
“For once, it will be better to be late rather than early,” Barrack said in a four-page letter to investors on Oct. 8, a copy of which was obtained by Bloomberg News. “There is no bottom because no one believes the messenger.’
“As all markets come to the realization that we are now in a worldwide systemic recession — not just a credit crunch — things may get worse,” the Los Angeles-based Barrack, 61, wrote in the letter, titled “In God We Trust — But Not Counterparties.”
“The massive restructurings, refinancings and re-pricings that will now take place, cascading from the financial world to the industrial world, will be legend. The complexities, repercussions and consequences to all parties are indeterminate.”
From Donald Trump’s Blog, the Donald quotes his good friend’s (Thomas Barrack Jr.) newsletter:
Why Can’t Anybody Find the Bottom?
It all boils down to trust! The mantra of the country is “In God We Trust–but not counterparties.” No buyer trusts any seller, banker, insurer or intermediary. No investor trusts any depository, insurer, broker-dealer or advisor. No Main Street citizen trusts Wall Street, and neither Main Street or Wall Street trusts the government. No counterparty in any transaction has confidence in the other. Values at every level have been artificially adjusted and when the air comes out of the “speculative hope certificates” everyone is pointing fingers at each other for fault and retribution.
The Worst is in Front of Us
Counterparties are renegotiating, borrowers are violating covenants, banks are finding any excuse not to fund existing commitments, insurers are negating liability, and renegotiations of responsibility and liability are being conducted at every level of the capital structure across the spectrum of companies.
There is no bottom because no one believes the messenger. With trillions of dollars of re-pricing occurring in these markets there is no hurry to catch the falling knife. There will be ample time once that last “dead cat bounce” has bounced and the government launches a coherent and consistent program. For once it will be better to be late rather than early.
Bottom Line: This is Not the Bottom.
Thomas J. Barrack Jr., “Is the World Going To ELE?”, October 14, 2008
Source: NakedShorts.com, Colony Capital
People who read this post also read these:
Tags: Banks, CDS, Credit, Dollar, energy, Fed, Housing Market, inflation, interest rates, Japan, Markets, Real Estate, Recession, spreads, Value
Posted in Economy, Markets | No Comments »
Hendry: 10-20 Years to Recover Thanks to ECB
Thursday, October 23rd, 2008
Hugh Hendry, CIO, Eclectica Asset Management told Power Lunch Europe that it will take 10-20 years to heal from the current turmoil in markets. This is a must see interview.
click image for video
Here is the summary of the interview:
Hendry has avoided risk the last few years. His hedge fund is up 20% YTD and 42% this month. He has been investing more heavily in long term US treasuries recently. Hendry is looking at increasing the risk exposure in his hedge-fund’s portfolio.
He pointed to Mervyn King’s hinting toward the “R” word as putting it mildly, that the big “D” is in the forecast.
“It’s not a question of losing out in a recession, I’m talking about 10 or 20 years before we recover from this. This is a catastrophe,” Hendry told “Power Lunch Europe.”
Hendry made an example of Hungary. He lambasted the Hungarian central bank governor, Mr. Andra Simor, who described the situation as akin to “the slower antelopes in a chase being devoured by lions one after the other.”
This stems from Hendry’s past involvement in discussions with European financial officials about European convergence.
Hendry specifically alludes to discussions he’d had with the Hungarian governor in particular regarding the integration of Hungary into the EU and that he warned against the way in which they planned to finance their move with Swiss Francs and Yen via the carry trade.
While in violin-playing posture, Hendry claimed,”It’s tragic.”
“What it [the reel] doesn’t reveal is that I sat there, he just said, you’re rubbish. I’m Hungary. I’m going join the EU. My interest rates are 8% and they’re going to be 4%. You’re a fool, You can’t catch me Mr. Lion, I can outsmart you, I can outrun you. And I said “I dare you.”
I said, “I’ll give you a head start.”
They suspended all economic rationality. Mortgages were given to poor people in Swiss Francs and Japanese Yen. They took on an enormous foreign exchange risk, because they thought that the little antelope could outrun the lions of economic intelligence. And you can’t.
Hendry said, “You can game the system, but you can’t beat it.”
There’s nothing crude, there’s nothing moral here. They were wrong.”
Dominoes. Iceland, Hungary, Latvia, Bulgaria, Eastern Europe, the dominoes are crashing. There’s economic disequilibrium. The economic chaos which we ignored for 5 years because we were bribed to ignore it, because they paid high interest rates. It was a bribe to ignore reality. But in a world where everything is falling down, the dominoes just crash. There is no answer.
Hendry’s beef is with EU and UK regulators and officials.
“I’m the heretic. I was laughed at, scoffed at, dismissed, ignored, at a time when investment bankers who advise governments, and who manage money, took reckless risk upon reckless risk.
We reached a point at which the Royal Bank of Scotland had a bigger balance sheet than the economy. Everyone looked the other way. Its not a question of losing out in a recession. I’m talking about 10 or 20 years before we recover from this. This is a catastrophe.
Forget about Mervyn King, UK Finance Minister, saying the “R” word. You wait until he says the “D” word.; depression. We had interest rates in the UK at 5% for a year as everything collapsed.
There’s a notion of stall speed. Never allow an aircraft to reach stall speed. That is the pledge central bankers must make. ” We won’t allow the economy to reach stall speed,” because everything below that you’re pushing on a string.
Interest rates in the UK will be 2% at the end of next year, and they’ll be 2% at the end of the year after that.
The ECB, the most hideous, intellectually conceited group of bankers, raised interest rates this summer; history will send the ECB to damnation because they have sent us to damnation. That’s the reality.
Thank you Mr. Hendry.
People who read this post also read these:
Tags: Carry Trade, COT, ECB, Economy, energy, Euro, Fed, Hugh Hendry, interest rates, Japan, Markets, Mortgage, Recession, SMI, UK, Video
Posted in Markets | 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 »
Governments Keep Making Mistakes: Jim Rogers
Wednesday, October 22nd, 2008
Jim Rogers, CEO, Rogers Holdings, appeared on CNBC’s European Squawk Box this morning with Geoff Cutmore, to discuss the progress of markets and his outlook.
click image for video
Rogers stated that the economy is in for high inflation given the size and nature of the central bank interventions and injections in to the financial system, and pre-ambles this saying,
“The world is unfolding. The American government keeps making mistake after mistake after mistake. Other governments do too. Unfortunately this is going to be a mess,” Jim Rogers, CEO of Rogers Holdings said Wednesday.
“Bernanke, and Paulson and the guy at the NY Fed, Tim G-r-eithner [or whatever his name is: slips Rogers] have been wrong every week for the last two years. Why do you think they know what they’re doing?”
He has covered most of his “shorts,” and wishes that he had not yet covered them, as their has been more downside.
He is long short-term US government bonds and short and shorting long term government bonds as he believes that we are heading for inflation. He has been buying agricultural commodities, though he admits that his timing is bad, as they are down.
“I bought some more agriculture earlier this week and it promptly went down. The fundamentals for commodities and agriculture have not changed,” says Rogers. “What’s happening in the world right now means that there will be less supply of everything coming out of this, and nobody can get a loan for a new zinc mine or a loan to increase their crop production.”
Rogers adds that
“What’s happening now is that we are in a period of forced liquidation; we’ve had 8 or 10 of these in the last 100-150 years; 1929 in the US, 1974 in the UK…We’ve had these before. The things that come out on the other side have always been the things that are unimpaired. The US financial system is impaired. The investment banking system is impaired.”
“But, commodities and agriculture are totally unimpaired by all of this. If history’s any guide, the things to buy will be the things that are doing fine; water treatment in Asia [for example], agriculture’s gonna do fine; that’s what you should buy.” Rogers adds, “However, my timing’s not very good.”
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke should resign for keeping alive “zombie banks” that should be allowed to fail, he said.
The Japanese government refused to let financial institutions fail in the 1990s, Rogers said.
“It’s 18 years later and their stock market is 75 or 80 percent below what it was 18 years ago,” he added.
Rogers also said that interest-rate cuts are coming.
“I know we are going to get aggressive rate cuts everywhere, that’s why I’m long short-term government bonds in the U.S., but shorting long-term government bonds because it’s not going to help, it’s going to add to inflation.”
Source: CNBC
People who read this post also read these:
Tags: Agricultural commodities, Agriculture, Asia, Banks, Bernanke, Commodities, Economy, EFU, Euro, Fed, Federal Reserve, inflation, Japan, Jim Rogers, Markets, Paulson, UK, Video, Water
Posted in Commodities, 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 »
Euro Down Against Dollar
Friday, October 3rd, 2008
As pointed out by one of our favourite commentators, Hugh Hendry, CIO, Eclectica Asset Management, Ireland’s plans to guarantee all bank deposits could have a destructive impact on the value of the Euro. |Take a look at the chart. At the time of this posting the Euro has dropped against the USD from $1.41 to $1.38. Despite the fact that EU central banker, Trichet, has opted to leave rates alone, the market appears to be paying attention to the toll that Ireland’s guarantees may have on the Euro if they are allowed to go forward with this.
Relative to this development that has arisen out of the widening of spreads and the tightening of credit in the UK and Europe (as well), the US dollar is enjoying the illusion of being stronger. Given the differences in monetary policymaking, it appears that in the near term, the strength of currencies will depend on the winning moves of some policymakers and the losing moves of others.
In this vein, it appears the Fed and the Treasury are making the winning moves. It remains to be seen what the EU will do. Take a look at the Daily and 3-day charts of EUR vs USD.
People who read this post also read these:
Tags: Chart, Credit, Dollar, Euro, Fed, Hugh Hendry, Monetary Policy, spreads, UK, US Dollar, usd, Value
Posted in Markets | 1 Comment »
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 »
Credit Crisis Observations
Tuesday, September 23rd, 2008
Niels Jensen and Jan Wilhelmsen of Absolute Return Partners (www.arpllp.com) produced an informative analysis of the credit crisis and provide the following observations. Here is our summary:
Loans and Mortgages are getting much harder to come by on average, globally.
This has bold and negative implications for property prices everywhere.
Observation # 1
It all began with housing and it will end with housing.
The current overhang caused by the tightness of credit (mortgages) will take years not months to unwind and housing prices will not begin to rise again until this occurs.
Observation# 2
Don’t trust central banks to always do the right thing.
Evidence suggests that while their intent seems to be genuine, central banks around the world have not been very effective at taming inflation. For example, simply raising interest rates in the underlevered economies of the BRIC countries has been futile, since most consumers and companies do not employ credit to the extent that those of us in the west do.
In the case of the BRIC countries, it appears the problem does not consist of sustaining growth, but rather containing growth. China, for instance, has a record of under-reporting both real and nominal GDP growth, and may have only recently more accurately stated inflation owing to the fact that they could not hide from skyrocketing oil and food prices.
Observation # 3
Policy mistakes are likely to be repeated.
The US is currently at risk of making the same policy making mistakes Japan made 10-15 years ago. US residential property prices have risen more during 2000-2006 boom than did the Japanese during the late 80s boom.
Japan too, though more rapidly, reduced the cost of money dramatically to fend off its crisis.
Japan bailed out many of its institutions and used taxpayers money to fund the activity of fixing the ‘unfixable,’ and this could have profound implications for the US GDP growth in years to come.
Observation # 4
The golden era of investment banks is over.
The biggest independent investment banks have just become banks. The US investment banking business is becoming more like Canada’s where the business is dominated by the large schedule “A” chartered banks and America’s “free” market just became a little more socialist. How ironic…The folding of GS and MS into banks also has valuation considerations for the venerated firms as their revenues and earnings are sure to decline under the auspices of Fed regulation. Further de-levering also has negative implications for the market as it entails more liquidation. Hopefully this will be done in an orderly fashion now that the conversion is underway.
Observation # 5
The final shoe hasn’t dropped yet.
There is more to come. For instance, the financial system has yet to deal with $1-trillion in Alt-A securities and further degradation of the CDS market and counter-party risks.
Absolute Return Partners states that the commodity bull is just the final leg of the liquidity super-cycle: take a look the Economist’s VAR-VAR-Voom chart.
Observation # 6
Leverage is ‘dead’ but capital is not.
Global savings rates now exceed 20%, except in the US, and while this is a positive for global stability, the question remains about whether investors are willing to invest money where it is most needed, the shore up the world’s banks. Failing that, property prices will need to stabilize before we can expect better times.
Observation # 7
The end of the crisis looks further away than it did a year ago.
Its complicated, very complicated.
Commodity price induced inflation has made it hard for policy makers to reduce interest rates. Despite this, interest rate cuts may not be the magic bullet and in 20 of the 36 countries recently surveyed by Morgan Stanley, real short-term interest rates are currently negative.
At this point the $700-billion Treasury/Fed proposal appears to be a solid response, as does the stimulus injections of cash into markets around the world.
This problem remains possibly years away from being done with.
Observation # 8
Traditional risk management has lost its way.
Paul McCulley of Pimco touched on the subject in the July 2008 issue of Global Central Bank Focus:
“[...] every levered financial institution - banks and shadow banks alike - decided individually that it was time to delever their balance sheets. At the individual level, that made perfect sense. At the collective level, however, it has given us the paradox of deleveraging: when we all try to do it at the same time, we actually do less of it, because we collectively create deflation in the assets from which leverage is being removed.”
In fact, while it is known that PIMCO was regularly consulted by Secretary Paulson, it was Paul McCulley who rightly proposed in his newsletter during the summer, that the only real solution would consist of the formation of a new government agency to create a market to thaw frozen or cemented assets. This would be the only viable long term solution.
Conclusion
Where is the opportunity? According to Absolute Return Partners, real value is to be found in credit instruments. This is where the most damage has been inflicted and it is where the biggest bargains are to be found in today’s markets.
What would you rather own? Equities which trade at 15-20 times earnings or credit instruments trading at a fraction of that cost? Deutsche Bank estimates that senior secured loans are trading at an implied PE ratio of 5-less than a third of the cost of equities.
You may read the full original version, at Observations on a Crisis, Courtesy John Mauldin
People who read this post also read these:
Tags: Banks, BRICs, Canada, CDS, Chart, China, Credit, Credit Crisis, EFU, energy, Fed, Focus, Food prices, GDP Growth, Gold, inflation, interest rates, Japan, liquidity, Markets, Mortgage, Paul McCulley, Paulson, PIMCO, Savings Rate, Trading, Value
Posted in Markets, inflation | 1 Comment »
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 »
Pershing Square Capital Management Releases Letter to U.S. Treasury Department Regarding Fannie Mae and Freddie Mac
Sunday, September 7th, 2008
Pershing Square Capital Management, L.P. sent the following letter September 6, 2008 (courtesy: BusinessWire) to the U.S. Treasury Department regarding Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE):
The Honorable Henry M. Paulson, Jr.
Secretary United States Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Re: Fannie Mae/Freddie Mac Restructuring
Dear Secretary Paulson:
We understand that a Treasury plan for Fannie/Freddie (”the GSEs”) may be announced this weekend. We thought you might find useful some further thoughts on potential GSE solutions.
As you are likely aware, we had previously distributed a proposed restructuring plan for the GSEs. In that plan, under a prepackaged conservatorship, equity interests would be extinguished, subordinated debt would be exchanged for warrants, and senior debt would be exchanged for new senior debt and common equity in the newly recapitalized entities. The government would write a put to the new common equity holders which would expire in three years.
It appears, however, that the GSEs may need help more quickly, and conservatorship may not be triggered until the GSEs are formally determined to be undercapitalized. As such, in the event the government needs to inject capital immediately, we suggest you consider the following transaction (”the Transaction”).
In order to minimize risk to tax payers while being equitable to other constituents, we suggest that the Treasury consider purchasing senior subordinate debt in the two companies in an amount sufficient to address their capital needs in the short to intermediate term. This senior sub debt would be junior in right of payment to the outstanding senior unsecured debt and senior to the outstanding sub debt, preferred stock, and common equity. We refer to the outstanding sub debt, preferred and common stock as “the Subordinate Securities.”
The issuance of senior sub debt is permitted under the GSE legislation and under the existing terms of the outstanding debt and equity securities of the two entities (please see the attached memo for further details). As a condition of Treasury’s purchase of senior sub debt, the GSEs would defer the interest payments on the outstanding sub debt (which can be deferred for as much as five years), and the dividend payments on preferred and common stock. All of the Subordinate Securities would continue to remain outstanding according to their existing terms.
The new senior sub debt should have a market-based coupon and Treasury should receive low-strike price warrants (penny warrants) for a substantial portion, i.e., 49% of the two companies. The coupon and warrant structure should be as close to fair-market-value terms as possible. The ultimate determination of fairness would be the willingness of non-government investors to purchase the Transaction securities on the same basis as Treasury. As part of the Transaction, the GSEs would deleverage their capital structures by paying down senior debt from the free cash flow generated by their core businesses further improving the position of the new senior sub debt.
The benefits of the Transaction are as follows:
- The Transaction can be accomplished under the existing terms of the outstanding GSE securities without any required consent other than from the GSEs.
- The new security would be senior in right of payment to the existing sub debt and preferred stock minimizing the risk to tax payers while providing substantial support to the outstanding senior debt that has been deemed implicitly guaranteed by the government.
- The new debt interest payments would be tax deductible, reducing the after-tax cost of capital to the GSEs, particularly when compared with preferred stock.
- In the event the outlook and performance of the GSEs and their assets were to improve dramatically, the senior sub debt could be redeemed, distributions to the Subordinate Securities could resume, and their values would increase accordingly.
- In the event that the GSEs’ fundamentals continued to deteriorate and they became undercapitalized, the GSEs could be placed in conservatorship. In conservatorship, their balance sheets could be restructured along the lines of our original plan or another plan with the Treasury’s senior sub debt treated preferentially to the Subordinate Securities, again minimizing risk to the tax payer.
- The Transaction would be fundamentally fair to all constituents and would respect the existing terms and corporate hierarchy of all outstanding GSE securities.
- The Transaction would minimize moral hazard issues for sub debt, preferred, and common stock investors.
Most importantly, we believe there are serious negative implications for other large financial institutions in the event the Treasury were to bail out Subordinate Security holders. The Treasury and OFHEO have done substantial research on the benefits to capital market discipline from large financial institutions’ issuance of subordinate debt, and the destructiveness of the government implicitly or explicitly guaranteeing such obligations.
See: Report to Congress “The Feasibility and Desirability of Mandatory Subordinated Debt“, Board of Governors of the Federal Reserve System and United States Department of the Treasury (December 2000), available at: www.federalreserve.gov/boarddocs/rptcongress/debt/subord_debt_2000.pdf
“Subordinated Debt Issuance by Fannie Mae and Freddie Mac“, Valerie L. Smith, Office of Federal Housing
Enterprise Oversight, OFHEO WORKING PAPERS, Working Paper 07 – 3 (June 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1000264;
“Signals from the Markets for Fannie Mae and Freddie Mac Subordinated Debt“, Robert N. Collender, Samantha Roberts, Valerie L. Smith, Office of Federal Housing Enterprise Oversight, OFHEO WORKING PAPERS, Working Paper 07 – 4 (June 2007), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1000240&rec=1&src abs=1000264;
(Due to its length, this URL may need to be copied/pasted into your Internet browser’s address field. Remove the extra space if one exists.)
“Subordinated Debt and Bank Capital Reform“, Douglas D. Evanoff, Federal Reserve Bank of Chicago, Larry D. Wall, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper No. 2000-24 (November 2000), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=252754.
To the extent the Treasury were to bail out the GSEs’ subordinate debt – which was: (1) never implicitly guaranteed by the government, (2) always rated below Triple A by the rating agencies, and (3) held by investors who knowingly took on the risk of loss in exchange for a substantial credit spread above the GSEs’ senior debt – it would endanger the systemic benefits from subordinate debt issuance for every highly leveraged banking institution in the world and the capital markets at large.
Furthermore, we do not believe that the Treasury can purchase GSE sub debt, preferred stock or common stock without incurring an immediate loss to tax payers because of the enormous amount of existing debt senior to these instruments. At a market coupon or dividend yield (to the extent that one were to exist), any debt issued pari passu to the existing sub debt, or preferred stock issued pari passu or even senior to the existing preferred stock would require a yield that would be uneconomic for the GSEs. No third-party investor would purchase these securities regardless of their terms in light of their junior position in the GSEs’ capital structure.
Please note that Pershing Square and affiliates own CDS on the subordinate debt of the GSEs. We also note that nearly all participants in the capital market debate on the GSEs are either long or short the outstanding GSE securities.
We are contemporaneously releasing this letter to the public in the interest of market transparency.
Respectfully,
William A. Ackman
Contacts
Pershing Square Capital Management, L.P.
William A. Ackman, 212-813-3700
People who read this post also read these:
Tags: Bail Out, CDS, Credit, EFU, Fannie Mae, Fed, Federal Reserve, Freddie Mac, GSE, Markets, Paulson, SMI, strike price, Value
Posted in Markets | No Comments »
US Inflation: Soon to Erode (BCA Research)
Friday, August 15th, 2008
The July headline and core inflation numbers were higher than expected. However, lower energy prices, if sustained, should begin to help cool inflation fears. In addition, core inflation will turn lower because the economy remains weak and companies are failing to pass through higher input costs.
We have highlighted several times before that core CPI is likely at a cyclical peak: inflation lags economic growth by several quarters and the economy continues to slow. We still assign a very low probability to rising inflation on a cyclical basis, because wage costs failed to rise during the economic boom and are already rolling over substantially. In addition, the gap between headline and core inflation is likely to close dramatically, via a sharp decline in the headline rate as both energy and food inflation cool. Bottom line: Hawkish Fed rhetoric is unlikely to translate into a change in policy rates for a long time because inflation fears should gradually recede. Further economic weakness remains the more immediate threat.
People who read this post also read these:
Tags: CPI, Economy, energy, Fed, inflation
Posted in Markets | No Comments »
UPS Hopes China Ads Deliver
Sunday, August 10th, 2008
Check out the new ‘China Only’ UPS ads, that we will never see on TV in North America. UPS is really pinning its hopes on these, now ubiquitous, China ads. Judging by the message of the ads, it appears that UPS understands that what the Chinese revere is good ol’ American ingenuity, probably more than American culture. You don’t need to understand Chinese to get it. China is an integral part of America’s corporate growth strategy.
In recent weeks, UPS’s ads have become ubiquitous in China, showing up on buses and subways, on TV and radio, and on the luggage carousels at Beijing International Airport. The tagline on the billboards targets China’s emerging business managers: “If UPS can fully assist the Beijing 2008 Olympics, they can fully assist you.”
Its not just advertising or talk. The company is putting its money where its mouth is:
UPS has been planning for this for three years, timing all the traffic lights along its Beijing delivery routes and measuring the height and width of every bridge, tunnel and overpass. The company estimates it will have handled 19 million pieces of equipment and other items by the end of the Games, using resources that include 2,000 employees and 217 trucks.
The target isn’t TNT, its China, and China acquisitions.
Source: WSJ.com. Alex Roth, August 11, 2008, UPS Hopes China Ads Deliver
People who read this post also read these:
Tags: China, Fed, International, Value, Video
Posted in Gold, Markets,