Archive for the ‘Credit’ Category
Monday, May 23rd, 2011
Jim Rogers is talking bubbles on Reuters Insider. Here he discusses why he thinks U.S. government bonds are the next big one.
“Well, bubbles are when everyone’s talking about it at the cocktail parties and when you walk, the TVs are turned on to whatever it isâ€¦. [T]he U.S. government long-term bond government bond market is probably the next big bubble. The idea that somebody would lend money to the United States government for 30 years in U.S. dollars at 3% or 4% or 5% or 6%, I mean, that’s just ludicrous to me. That’s a bubble.” (more…)
Thursday, November 18th, 2010
Luminous Capital Partner Alan Zafran has been charting bond prices and says in a note to investors that understanding what’s happening in the bond market is key to knowing when falling prices represent a buying opportunity.
Check out the table below. These are dramatic moves downward in price.
| ||6/1/2010||9/1/2010||11/1/2010||TODAY (W/CHGS)|
Why is this happening?
1. U.S. Treasuries have sold off sharply following the announcement of QE2, and municipal bond yields trigger off of Treasury yields.
2. As a trader/investor, you canâ€™t directly short municipal bonds; the market is one-directional. Names either get bought or sold. So the municipal bond market got overbought and was ahead of itself. This was exacerbated by the fact that municipal bond funds that are performance-driven could not afford to hold cash at 0.00% yields and therefore were fully invested into the QE2 announcement.
3. Municipal bond ETFs are getting sold, and that is causing the underlying bonds of the ETFs to be sold (further causing sellers to appear in the municipal bond marketplace). Municipal ETFs are a bad idea, and is this all we need to see the evidence of this fact. Municipal bonds aren’t liquid enough to have an ETF tied to them.
4. There are lots of leveraged holders of municipal bonds (e.g. the Oppenheimer Rochester National Municipal Bond Fundâ€”ORNAXâ€”is 20% leveraged).
5. There has been talk of a possibility of the elimination of the BAB (Build America Bond) subsidy from the federal government at year-end, instigating a very large issuance of long-term municipal bonds.
6. Consequently there have been very high levels of supply of municipal bond issuance this week due to the municipalities’ budget needs and the potential elimination of the BABs subsidy. (See chart below).
7. Investor fear has therefore led to bids disappearing in a less liquid municipal bond market (broker dealer desks get hit hard initially and subsequently have less willingness to support the market and buy more bonds as sellers show up).
8. Pouring salt on the wound, tobacco bonds were downgraded to junk (BB- from BBB) by S&P and have widened by 1.00% (a huge move) in the last week. In price terms, this means the Ohio Buckeye Tobacco bonds maturing in 2047 fell from $103 to $93 (10%) in a week!
When will this be a buying opportunity?
Likely soon. Intermediate-term positives include:
1. The U.S Treasury sell-off may hit some technical support levels.
2. The BAB subsidy may be negotiated and included in a tax cut compromise.
3. Municipal bond supply tends to be markedly reduced once Thanksgiving arrives. Most of the supply will be gone in a week.
4. Eventually investor fears will subside and investors will recalibrate to a new, higher-yielding environment. For instance, the North Texas Tollway executed a new bond issuance today at a yield of 6.25% (vs. the 5.25% initial price talk).
Monday, February 8th, 2010
Distressed investing was one of the best performing hedge fund strategies in 2009, up nearly 43% according to the Hennessee Groupâ€”and many experts see continued opportunities in 2010. The recession may have been declared over, but companies and governments are still facing major problems.
Join HedgeWorld and a panel of distressed investing experts as we discuss the outlook for distressed in 2010. We will review the results of our annual HedgeWorld-Dykema Insolvency Outlook Survey, which asks managers for their views on the current state of the distressed world and how they’re positioning themselves for the future. We’ll also talk directly to managers and other experts in the distressed space, including lawyers and turnaround specialists to find out from them how they see things playing out this year.
During this 90 minute program, topics that will be covered are:
How portfolio construction is changing to accommodate changes in allocations to distressed investment opportunities.
What to know about the bankruptcy and insolvency process before you invest in distressed assets, or with distressed specialist managers.
What economic and business factors are likely to affect the distressed space the most in the coming year?
What’s involved in loan-to-own strategies whether they are seen as more or less attractive in the coming months?
Where the best distressed investing opportunities lie in the coming year.
For more information, or to register, click here, or paste this link into your web browser: http://online.krm.com/iebms/reg/reg_p1_form.aspx?oc=10&ct=00373901&eventid=16612
Monday, September 22nd, 2008
From an opinion piece in Thursday’s Financial Times:
“Indeed, any lender would have been encouraged by his words in April 2005: ‘Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending.’ Well, he was right about the rapid growth in subprime lending.”
One theory holds that nobody could have foreseen the credit troubles we’ve been dealing with for the past year, not even that great seer Alan Greenspan. Except that some people did, including some people not even in the finance industry. Here’s author and urban critic James Howard Kunstler writing on May 23, 2005:
“The wealth accumulated in the US in the second half of the last century is actually shrinking now, since our industrial base is withering away, and whatever investment we are capable of making has been increasingly directed into the “hard assets” of houses. The catch is that the “investment” in houses is almost all credit — mortgages, promises to pay most of the money later. The catch of the catch is that the cost of obtaining credit (interest rates) remains supernaturally low and the standards for creditworthiness have ceased to exist. The catch of the catch of the catch is that a lot of the mortgages are adjustable, meaning the cost of borrowing doesn’t necessarily stay supernaturally low. It can float with rising interest rates. Finance professionals know that these conditions are perverse and perilous.”
Wednesday, August 27th, 2008
The hits just keep on coming for the Federal Deposit Insurance Corp. On Tuesday we learned that the list of troubled banks the FDIC is keeping an eye on grew from 90 in the first quarter to 117 as of June 30. The FDIC also disclosed yesterday that the failure of IndyMac Bank, once predicted to cost between $4 billion and $8 billion, will now more than likely cost nearly $9 billion.
Perhaps in response to the gloom emanating out of the regulatorâ€™s Washington offices, it made Chairman Sheila Bair available to the Wall Street Journal and the New York Times for interviews. Whatever else was said during her time with the Journal, the news that made page A11 of the paper this morning was less than confidence-inspiring. Because of the wave of bank failures, the FDICâ€™s deposit insurance fund balance has fallen to $45.2 billion, just more than 1% of all insured deposits. According to the Journal, this is low by historical standards.
In response, Ms. Bair said the FDIC may borrow money from the U.S. Treasury to cover â€śshort-term cash pressures caused by reimbursing depositors immediately after the failure of a bank.â€ť The FDIC insures bank deposits up to $100,000. Both the Journal and the Times also reported that the FDIC is considering raising the fee it charges banks for insurance by 14%, or 14 cents for every $100 of deposits.
Journal reporters Damian Paletta and Jessica Holzer pointed out in their story that the last time the FDIC tapped the Treasury was at the end of the savings and loan crisis in the early 1990s. What might be termed the â€śnuclear option,â€ť accessing a $30 billion line of credit the FDIC has with the Treasury, isnâ€™t necessary now, and Ms. Bair told the Journal she didnâ€™t expect it would be going forward.
If only I had a dollar for every time a government official said he or she â€śdidnâ€™t expect thatâ€ť some drastic thing would happen or some last resort option would be necessary.
As if to reinforce the precarious state of the banking system, a page one story in todayâ€™s Journal details a new potential woe for banks: the reality that some $787 billion in floating-rate notes that banks have used over the past two years to stay afloat, will come due before the end of 2009. About $95 billion worth of those notes will mature in September, according to the Journal. The banks say they have enough money to redeem the notes, but again, if I had a dollar for every time over the past year a bank official has downplayed potential problems, I could pay off my house.
Every dayâ€™s a party. . . .
Thursday, July 17th, 2008
Some years ago, my parents bought a pretty little flat a few miles from the bustling beach town of Torrevieja which is located in the south of Spain somewhere between Alicante and Malaga. Although they intended to retire there to enjoy the sunshine, they have spent precious little time there over the years, demonstrating a clear and to my mind perverse preference for the London gloom.
Three years ago I went to pass a week of the summer holidays there. Far from being a typical Spanish town, the whole area had been anglicized. There were pubs with satellite television showing British football matches watched by what looked like typical British football supporters, fish and chip shops, British newspapersâ€¦ Not a sign of jamĂłn, paella or any native Spanish speakers for miles.
But the local services left a lot to be desired. The rubbish collectors had obviously been taking tips from their counterparts in Naples, the nearest bus service was miles away, there was no pharmacyâ€¦ Clearly the local administration had been happy to grant planning permission for new and sometimes haphazard construction, probably garnering a healthy percentage of the inflows coming from home buyers moving into the area from abroad, but it had given precious little thought to the infrastructure that an entire community of foreign residents might need.
Nonetheless, the new residents were an undemanding lotâ€”an English breakfast, the Sun and a couple of pints with their pub lunch, preferably while watching Man U against Chelsea, and they were happy. Whatâ€™s more, in just a few short years they had seen the value of their homes skyrocket as a growing number British expatriates sought to find a little sun while moving into a community which spoke their own language. Because these were the boom years in Britain, and many people could not only afford foreign holidays now, they could actually afford foreign homes. Nor was it just only the Brits moving in to find the sunâ€”I was told that many German and Scandinavian communities had also sprung up in recent years on what was once barren ground.
One day I decided to take a long walk into the countryside, and it was one of the most depressing walks I have ever taken. I did not find any countryside. My seven mile walk took me past endless housing complex developments at various stages of completion, in what probably once had been beautiful country. Where there were no buildings, the land had been bulldozed in preparation for construction. â€śThis is insane,â€ť I thought to myself.
And, of course, it couldnâ€™t last.
And it didnâ€™t. Now both the residents and the authorities in that areaâ€”along with those in many others that had been built up so rapidly in this part of Spain in order to profit from the housing price boomâ€”is learning how oversupply of homes can force prices quickly back down. Many of the recently-completed properties are still on the market, and are being offered at vastly inferior prices compared to last year, even more so when compared to the year before. The British, Germans and Scandinavians who were buying these houses and flats are no longer doing so. The British in particular are beginning to realize that credit is getting expensive, that their debts are probably unsustainable as things stand, and that house prices do not rise indefinitely, at home or abroad. Some buyers, now finding the market value of their homes way below what they owe on their mortgage, have given up and decided to stay at home, in the rain.
And what of the mortgage lenders? According to Bank of Spain, not only have Spanish banks by and large avoided buying subprime and other mortgage-based securities from the United States, they have also maintained prudent lending standards at home, with loan to value ratios generally running at around 80% or less. Caja Madrid put its non-performing loan ratio at 0.90% of qualifying credit risk at the end of 2007, â€śconfirming Spanish institutionsâ€™ relative strength versus international peers,â€ť according to the bankâ€™s annual report.
No subprime exposure in Spain, then, and no problems with home-originated mortgages? Yeah, right.
The effects of the property price collapse are yet to be accounted for. Who is holding the mortgages, and how much, under fair value accounting, have they lost. There have been few answers as yet. I for one believe that at least one or two Spanish bankers are walking around with a slice or two of jamĂłn over their eyes.
Tuesday, July 15th, 2008
We’ve been thinking a lot at HedgeWorld about the credit crisis and how to cover it. The story seems too big to handle in some respects. The pace of news and the scope of the potential problem is dizzying and disturbing.
One of my colleagues here reminded me of something I wrote back in March, in an email I sent to him about what seemed then like the zenith of the crisis, the Bear Stearns Cos. Inc. meltdown and subsequent Fed-forced sale to JP Morgan Chase. Sadly, but perhaps not unexpectedly, that turned out not to be the crest of the wave, or even close. Here’s what I wrote then:
It all goes back to the mortgage market and the kudzu quality of these debt securities that include mortgages. For all y’all that don’t know what kudzu is, it’s a vine that, once introduced into a particular environment, worms its way throughout a garden and eventually takes it over. It’s insidious and difficult to kill. This is what the Fed and most of Wall Street doesn’t seem to get. They’re trying to put out all these separate fires: the value of the dollar, energy prices, mortgage defaults, credit problemsâ€”when it fact it all stems from the same problem: the inability of people to pay their mortgages. That problem’s roots go all the way back to the pattern of development we’ve followed for the past 50 years, an unsustainable expansion of dreck across the landscape, all of which is dependent on cheap energy to function properly. Energy is no longer cheap, and not surprisingly things are starting to not function properly.
Or, as Bill Bonner wrote yesterday of Fannie and Freddie on his excellent Daily Reckoning, “â€¦ here at The Daily Reckoning we know how they got themselves into such a jamb. They lent money to people who couldn’t pay it back. And they weren’t the only ones.”
That about sums it up.
It doesn’t make the story any easier to cover, but it puts things in perspective. Books will be written about this period in our history, and we will be judged to have been reckless and foolish in terms of capital allocation and full of hubris when it came to thinking financial engineering could overcome the reality that people ultimately cannot pay back loans with money they don’t have.
Monday, June 30th, 2008
My father used to tell us that the military draft is a great melting pot, not that it would have any impact on my own life, but it was always good to know. I was raised in France when we had both the draft and much social class divides. And so, my father used point out: where else can you meet people from other social upbringings? Where else can a young man learn how to make his own bed and drive a car?
You donâ€™t learn how to make your bed or drive on Wall Street although sometimes I wonder if it wouldnâ€™t be a good place to start learning what you think you already know. And to be sure, you donâ€™t meet people outside of your own league in Wall Street.
Bankers meet bankers. Prime brokers talk to hedge fund managers. Fund marketers play golf with the same pension board members sometimes for nine, twelve months in a row. Regulators say: â€śCome on you here, have some quality time with us.â€ť The love oftentimes is not mutual. But when and where do all those different breeds of people meet? At the Ulysses bar on Stone Street in downtown Manhattan? Too crowded. On social networking websites such as Linkln and Facebook? Too distracting. So where?
Wednesday, June 18th, 2008
Today is taking on a glass-half-empty feel. The Royal Bank of Scotland has issued a report advising clients of an imminent global stock and credit crash. According to the Telegraph online, Bob Janjuah, RBS’ credit strategist, who correctly predicted the current credit crunch, said, “A very nasty period is soon to be upon usâ€”be prepared.”
He foresees a 300-point drop in the Standard & Poor’s 500 stock index, a blowout in corporate bond spreads and higher inflation. “Cash is the key safe haven,” Mr. Janjuah said. “This is about not losing your money, and not losing your job.”
Wednesday, June 11th, 2008
Â One gets a different perspective listening to people in the trading business. Attendees at a conference last week on trading, organized by Tabb Group and Rosenblatt Securities Inc, were talking about frequent tradersâ€”not only big hedge funds likeÂ Citadel Group but also little hedge funds that trade a lot daily.Â Â
Do you worry about the new high-frequency players who havenâ€™t been around in past high volatility times? a member of the audience asked. Do you worry that their models will cause the market to explode? he asked.