Interesting report out from Karen Weaver, Deutsche Bank, arguing that the percentage of owners with negative equity would double by 2011. Most of the information should be familiar to the readers.
The next leg? The percentage of conforming borrowers with negative equity is expected to go up by more than 250%. Karen predicts 41% conforming borrowers to have negative equity in 2011 compared to 16% in the first quarter. The numbers for prime jumbo go to 46% from 29% currently.
Read more here, or watch the CNBC interview by clicking on the image below.
Just a note that CNBC incorrectly highlights that half of American homeowners would be underwater in 2011. Bubblevision for a change decides to be uber bearish! It’s not half of American homeowners, but half of American mortgage holders who would be underwater. This is of course all dependent on job losses. If job losses do not peak at 10% but keep heading up, this thing is going to get a lot worse. Which is why jobs are a leading indicator in this whole thing.
Negative equity. Underwater mortgages. Drowning homeowners. Maybe time for a few swimming lessons!
Source:
FT Alphaville
Deutsche Bank on those drowning US homeowners
http://ftalphaville.ft.com/blog/2009/08/06/65536/deutsche-bank-on-those-drowning-us-homeowners/
CNBC
Drowning in Debt
http://www.cnbc.com/id/15840232?video=1206971011&play=1
Wednesday, August 12, 2009
Half of American mortgage holders to be underwater by 2011
Monday, May 5, 2008
Quotable Quotes: The World this week.
This is a weekly update on what I've been reading and watching. To encapsulate, you had asset class predictions from GMO and BCA's perspectives on Brazil. Three strategists recommended selling this rally. Peter Bernstein reflected on the similarities to the Great Depression, and Bill Gross talked about a fat-tail possibility. The Indian finance minister's comments qualified him for the "bizarre quote of the week". Buffett: "We're not in the business of resetting mortgages higher". That's quintessential Buffett for you. Candid, honest and fair. Long term profitable ventures are sustainable in nature, and you cannot sustain predatory lending which dupes gullible borrowers beyond a point. Berkshire's enterprises have a very human face to them (Sudan and PetroChina controversy notwithstanding), something that corporations would do well to keep in mind. With this fitting prelude, let's dig in. Jeremy Grantham came out with GMO's seven year forecast on various asset class returns. I thought this chart was good food for thought: BCA Research is clearly positive on Brazil's prospects: P Chidambaram (Indian Finance minister) (Bizarre quote of the week) : "If rightly or wrongly people perceive that commodities- futures trading is contributing to a speculation-driven rise in prices, then in a democracy you will have to heed that voice." Comment: I seriously worry that we could have a black swan event in food and commodity prices, further exacerbated by political expediency. There are elections in India next year, and the political posturing has begun. Deficit is high, inflation is out of control, futures trading on food staples has been banned, fuel subsidies are distorting fuel usage, exporters are demanding tax incentives, sops or government intervention in keeping the rupee pegged to the dollar. The list goes on . The news from China isn't getting any better. Increasing emerging markets trade protectionism could undo the WTO trade benefits, further throwing a spanner in the Doha round of negotiations. Check out this Don Coxe interview for his take on the current situation.. Former fed official Vincent Reinhart : "The central bank's rescue of Bear Stearns was the worst policy decision in a generation. Desmond Lachman, Chief Economist of the American Enterprise Institute: "Further interest rate cuts and a second stimulus package are required. Unorthodox measures are needed to stabilize the housing market. " -Household wealth reduced by $2 trillion till date. "I'm a child of the Depression, and I am thinking about what the early years were like after World War II. It took a very long time to get the memory of the Depression out of business decisions, and certainly banking decisions. I think this is going to be the same. Adam Myers, market strategist at Credit Suisse: “Money markets are reflecting a level of caution which is not reflected in credit or equity markets. The difference between the two is that … a money market trader has a much better idea of solvency of their trading counter parties than does an asset fund manager. Given money market traders’ proximity to balance sheets, they get clear information from buying and selling of money between each other. The view of the equity and credit market is far too sanguine.” "The real economic effect of this credit crunch is only beginning to be felt. We are going to see a much more substantial impact than is reflected in equity and credit markets." Morgan Stanley analyst Betsy Graseck: Sell bank shares “We think it is a mistake to chase this rally,” she writes. “The risk is much greater that credit deterioration will accelerate and banks will raise more dilutive equity and cut dividends than expected.”consumer net worth is likely to decline 11% over the next two years due to the housing decline, and loan losses will continue to rise. This will drive weakness in commercial asset classes, “as corporates who sell to consumers suffer from slower top-line growth.”“we think we are only in the 3rd inning of the credit cycle and expect this credit cycle will be worse than 1990-91.”
I haven't had a chance to read the transcript of the annual Berkshire conference. I did manage to catch this quote from a Marketwatch article, which discussed Berkshire's acquisition of a portfolio of subprime mortgages with frozen interest rate resets.
The panicked decision jumped over other possibilities and may prove as damaging as Fed policy errors that caused the "great contraction'' of the 1930s and the "great inflation'' of the 1970s.
The Fed's actions eliminated forever the possibility that the Federal Reserve could serve as an `honest broker'. The central bank also "tilted the political playing field toward direct mortgage relief. "
-Real prices 20% above equilibrium.
-Excess inventory of 1 million.
-Case-Shiller Indices predicting further declines.
-Sub-prime lending dried up.
-Record foreclosures.
-Commercial property burst
-Goldman Sachs estimates 1.2 trillion in losses
-Interest rate spreads have widened, neutralizing Fed's interest rate cuts.
-Fiscal stimulus neutralized by high oil prices.
-CDS market a hidden non-bond sector danger.
The people who think we will have turned in 2009 are wrong. There has to be a respite along the way. Nothing goes in one direction forever. But it will take longer than people think."
To take advantage of the aforementioned potential stock market pattern, we have recommended numerous trading and investment positions. Speaking to the trading positions, we have continued to move stop-loss points “higher” as the rally has progressed; and would look to sell many of these positions into any “blue heat” upside type of hour toward SPX 1440. "
Bill Gross Investment Outlook:
"Lower Fed Funds? They would, in PIMCO’s opinion, likely do more damage than good from this point forward.
Mohamed El-Erian has been counseling to at least consider a fat-tail possibility that could stop us in our tracks on the list of our strategic battle plan. (Note: I pondered on the possible consequences of this possibility in this post)
Mohamed suggests the possibility, not the probability, that recent euphoric moves in equity prices and credit market spreads might be premature. The market’s justification may rest on the two-barreled conclusion that, 1) the delevering of the financial system is reaching a natural culmination as prices stop going down and banks and investment banks recapitalize their balance sheets, and 2) that numerous and previously unthinkable policy responses have restored enough liquidity to relubricate our finance-based economy. Recession, and its vicious-cycle effect on employment and consumer spending, remains a threat and this recession, although currently mild and as of yet not even officially validated, may not be your garden-variety, father’s Oldsmobile-type of downturn.
Because the U.S. and selected other economies are now substantially asset-based and dependent on stable and upward tilting prices, a deflation of an economy’s primary financial asset can be ruinous. Its deflationary thrust must be countered, wrote Minsky, or else the battle might be lost. If so, the real economy as Mohamed El-Erian suggests, might become so shell-shocked that financial markets once again turn down instead of up. "
Full Disclosure: No positions in any securities mentioned.
Read the rest of this entry >>
Sunday, April 27, 2008
Quotable quotes: The World this week.
This is a weekly update on what I've been reading and watching. Here's what the market gurus are saying and how they are positioning themselves in the near future.
Robert Shiller:
Yale University economist Robert Shiller, pioneer of Standard & Poor’s/Case-Shiller home-price index, said there’s a good chance housing prices will fall further than the 30% drop in the historic depression of the 1930s. Home prices nationwide already have dropped 15% since their peak in 2006, he said.
“I think there is a scenario that they could be down substantially more,” Mr. Shiller said during a speech at the New Haven Lawn Club.
Joseph Stiglitz: US facing long recession:
The U.S. economy is already in recession -- and may echo the 1930s, Nobel Laureate Joseph Stiglitz said Friday.
"This is going to be one of the worst economic downturns since the Great Depression," said Stiglitz.
Other downturns were primarily caused by excesses in inventories or inflation; but this slowdown is due to the condition of "badly impaired" banks and financial entities, which are unwilling and/or unable to lend capital -- stymieing the very borrowers who usually drive the country back to vitality, Stiglitz said. And the Federal Reserve may have used up its ammunition -- and the faith investors and planners have put in it.
"The savings rate as we go into the recession is zero. Which means [savings] will go up, " he said -- decreasing consumer spending and weakening retail further.
"If you really wanted to stimulate the economy, increase unemployment insurance," he suggested.
Economy has been impaired by Bush tax cuts. These, plus the Iraq war, are to blame for the majority of the mess we are in.
Jeremy Grantham rips Greenspan: (Must read)
It’s not that the former Fed boss Greenspan was incompetent that is remarkable. Incompetence is common enough after all, even in important jobs. What’s remarkable is that so many people don’t seem, even now, to get it. Do people just believe high-quality self-justifying blarney?
Greenspan came onto my radar screen in the late sixties as a seller of economic and financial advice to the investment industry. To be brutally honest, he was considered run of the mill by anyone I knew then or have met later who knew his service then. His high point in most memories, certainly mine, was a famous call in January 1973 that, “it is rare that you can be as unqualifiedly bullish as you now can,” a few days before a market decline of over 60% This was one of the first of a long line of terrible prognostications for which he has remarkably not been remembered.
Greenspan’s book and, even more disgraceful, articles in the Financial Times (and that’s a very high hurdle!), sidestep all blame and admit few errors. His article described housing “as an accident waiting to happen.” Actually it’s brilliant when you think about it: take a distant, almost academic tone and perhaps people will ignore the facts that: first, you allowed the situation to develop; second, did not apparently see it forming (despite 2½ to 3 standard deviation data for housing that suggested a 1 in 80-year event); and third, obliquely or directly blame others. It really is shameful!
Looking back at the evidence (strong circumstantial evidence is all you can often get in economics), we can see that the two great economic setbacks of the 20th Century – the 1929-34 Depression and the rolling depression in Japan since 1989 – were both preceded by major asset bubbles and speculation. Milton Friedman and his troops can maintain that this suggested relationship between bubbles and troubles is nonsense and that all that was needed was good monetary policy. My response is that this view represents a touching faith in economic and financial theory of which tricky humans make a mockery.
Equities, though, are the Mr. Hyde to fixed income’s Dr. Jekyll. Where poor Dr. Jekyll sees drawn out problems, Mr. Hyde sees opportunities and quick recoveries. The animal spirits of the stock market have been nurtured by strong fundamentals and generous credit globally and fertilized by increasing quantities of moral hazard since 1982. Stocks refuse to worry that this is indeed the end of an era, as we believe, and apparently as much of the fixed income market believes. This has been a classic case where secondary, low-quality companies that have fundamentally thrived in this extended boom ended up with both peak margins and a premium P/E. Because of this past favorable set of circumstances, the low-quality companies are exposed to a triple threat: their absolute and relative margins decline; their P/Es fall relative to the market, multiplying their pain; and they are far more exposed than average to a severe credit crisis. still believe that the U.S. market will not bottom for some time – 2010 still looks good – we must be prepared for plenty of rallies to fill in the time. High animal spirits, fortified for so long by good times and moral hazard, will not give ground easily.
David Kotak (Cumberland) :
The minimum bid in the most recent auction (April 21) was 2.05%. In the previous auction (April 7) the minimum bid was 2.11%. In the most recent auction the stop out rate which was awarded to all bidders was 2.87%. In the previous auction the awarded rate was 2.82%. So the minimum bid went down while the award rate went up. The spread widened by 11 basis points. That is not suggestive of a market returning to normalcy.
Remember that this auction occurs when the Discount Window rate is 2.5% and when the targeted Fed Funds overnight rate is 2.25%. And it is important to understand that the minimum bid specified is a market based price of the expected Fed Funds rate over the 28 day term. We should also note that the TAF auction rate was very close to LIBOR. And LIBOR has been the subject of much negative press recently as followers of money markets know.
Our conclusion is that credit markets are still dysfunctional and the process of normalcy restoration has a long way to go. And there seem to be reasons why banks are reluctant to borrow and extend credit to others in the banking fraternity. Some suggest that there is distrust of banks by other banks. They call this counter party risk. Others suggest that banks are hoarding cash and quoting higher interbank lending rates in order to discourage borrowing.
We offer this final note. Various measure of spread based risk premiums have been at extraordinary levels since last June when the turmoil started. These widened spreads are taking an economic toll. We expect that the Fed will persist until it gets them to narrow.
If the Fed fails, we will have a difficult and protracted deflationary recession. If the Fed succeeds, the slowdown will be shorter and shallower. The Fed’s success will be easily measured in the narrowing of spreads. In the case of the TAF one will see the stop out rate fall to a level closer to the Discount Window rate.
John Mauldin: (Money Velocity mean reverting)
Now, why is the velocity of money slowing down? Notice the real rise in V from 1990 through about 1997. Growth in M2 (see the above chart) was falling during most of that period, yet the economy was growing. That means that velocity had to rise faster than normal. Why? Primarily because of the financial innovations introduced in the early 90's like securitizations, CDOs, etc. It is financial innovation that spurs above trend growth in velocity.
And now we are watching the Great Unwind of financial innovations, as they went to excess and caused a credit crisis. In principle, a CDO or subprime asset backed security should be a good thing. And in the beginning they were. But then standards got loose, greed kicked in and Wall Street began to game the system. End of game.
What drove velocity to new highs is no longer part of the equation. Its absence is slowing things down. If the money supply did not rise significantly to offset that slowdown in velocity the economy would already be in a much deeper recession.
Bill Miller :
I think the credit panic ended with the collapse of Bear Stearns, and credit spreads are already much improved since then. If spreads continue to come in, the write-offs at the big financials will end, and we may even have some write-ups in the second half instead of write-downs. Valuations are attractive, and valuation spreads are now about one standard deviation above normal, a point at which valuation- based strategies usually begin to work again, and momentum begins to fade. I think likewise we have seen the bottom in financials and consumer stocks, but not necessarily the bottom in headlines about the woes in those sectors. Although the economy is likely to struggle as it did in the early 1990s, the market can move higher, as it did back then.
The wild card is commodities. If commodities break, or even just stop their relentless rise, equity markets should do well. If they continue to move steadily higher, they have the potential to destabilize the global economy. I agree with George Soros that commodities are in a bubble,
but it also appears he is right when he describes it as one that is still inflating, and we still have the summer driving and hurricane season with which to contend.
The Fed, in my opinion, needs to focus on the value of collateral and not on the price of credit.
Michael Kahn (Barron's getting technical):
Helping the bullish argument: The S&P 500 index has been able to hold its ground over the past few days. Mild pullbacks are often due to profit-taking rather than an urgent desire to get out of the market or sell it short. Contrast recent action with the January, February and early April peaks when the market sold off sharply within only one or two days. Strong markets tend to pause at resistance levels as they prepare to break out to the upside.
Market bears point out that volume over the entire March-April rally declined. I am always harping on how a rally without volume is like a car on an empty fuel tank. It can coast, but powering higher is unlikely.
But the index made a slightly lower low in March than it did in January, while technical indicators such as momentum made a higher low. This divergence between price and indicators is somewhat bullish and that makes resistance at 1395 for the S&P 500 important from a long-term point of view as well as from the short term.
A move above that level would also resolve a long-term pattern to the upside at the same time as breaking out from a shorter-term pattern. It is decision time for the market. There is technical evidence favoring both bulls and bears so we have to let the market decide who is right. Drawing a conclusion while the S&P 500 and many other indexes are in four-day pauses below key resistance levels is a bit hasty.
John Thain:
On the capital side, we've increased our stated capital from $36.7 billion at the end of the fourth quarter to $41 billion. We are well capitalized under the risk weighted asset tests. And, for those of you who like to blog, we do not have any plans to raise any additional common equity, and Nelson actually agrees with that.
Deutsche Bank:
Germany's biggest bank today banned staff from visiting brothels on expenses and putting hotel TV porn channels on their company credit card.
The crackdown came in new rules issued to executives as Deutsche Bank cuts costs after losing at least £2billion so far in the global credit crunch.
"Deutsche Bank does not approve of any adult entertainments and such expenditures will not be reimbursed", according to the memo leaked to news magazine Spiegel. According to Spiegel, the new edict was aimed at senior staff in the bank's communications and social responsibility department.
Monday, April 21, 2008
Profiting from the market gurus: quotable quotes.
This is a weekly update on what I've been reading and watching. Here's what the market gurus are saying and how they are positioning themselves in the near future. "It seems everybody says it'll be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways. Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that. " "You don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time." Monetary policy will be less effective. Problem in economy is not of illiquidity but of insolvency. We have problems due to bankrupt households, bankrupt mortgage lenders, bankrupt corporates, bankrupt financial institutions, and bankrupt homebuilders. It may echo the Lost Decade in Japan, where stocks fell 80pc. The yields on state bonds kept falling as debt deflation engulfed the banks, thwarting efforts to nurse lenders back to health by the usual device: "steepening yield curve". The authorities were left chasing their own tails. Having lived through this, Japan's chief regulator Yoshimi Watanabe has advised Washington to go for a quick taxpayer rescue, rather than trying "to fix the hole in the bathtub". Disclosure: None
"You're right. They are going in that direction. That's why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago. "
Jim O Neill on recession: The recession is in US domestic demand. Overall GDP is getting a big help from overall exports. This is softening the blow, and hence US recession will be shallow.
Roubini on global coupling: Global coupling/decoupling depends on whether we have a severe or shallow recession. In a severe one, the transmission mechanism through the trade channel, credit crunch, weaker dollar, and the financial institutions would lead to a severe slowdown of the global economic growth.
Roubini on Europe: We have the slowdown, deflation of the housing bubbles, the high oil prices, and a Fed that is cutting while ECB is on hold. A lot of Europe's growth was based on extra demand rather than income growth. The credit crunch is effecting European firms ability to borrow.
a) Dow breaks through Feb highs
b) A/D line advancing
c) New highs expanding
d) VIX falls to four month low.
Q1 scorecard: Median EPS growth 8.6%. Average EPS growth: -27.2%
Well, it's a lot of money. I'm all for capitalism. PIMCO is a great capitalistic firm
We make money. We sell lemonade. We sell it at 50 cents a glass however and hedge funds sell them at 5 bucks. If you're going to sell lemonade for 5 bucks you better have a shot of tequila or a shot of vodka in there to juice it up. And my point is that hedge funds over time don't have that vodka or tequila in that glass, and they are overpricing their products. That's fine, but over time the public will get wise and their lemonades will go to the PIMCOs of the world.
"On a 12-month view, earnings expectations are too high, but equities are quite cheap and there's no massive downside. We expect volatile markets that won't go anywhere for the next year," he said.
Whatever happens, there will always be tactical rallies. Mr Edwards cites four Wall Street bounces above 25pc in the 2001-2003 bust. The buying cue is when investor gloom nears black despair. The put/call ratio on options is now at a bearish extreme of 0.90.
"That would historically suggest that a joyous 25pc spring rally is close at hand," he said. Yet Mr Edwards remains wary as long as analysts cling to their belief that earnings will rise 11pc in 2008. This is not the sort of "washout" level of gloom required to clear the air.
"The Federal Reserve's actions have averted financial Armageddon, but they cannot avert an earnings recession. We don't expect a new bull market until early 2009,"
Morgan Stanley says earnings will fall 16pc this year as debt leverage kicks into reverse.
"Bear markets are terrible for the human psyche. You get one profit warning after another. People see their hopes dashed so many times that they stop believing," He is not predicting a bloodbath along the lines of 1929-1933 (-88pc) or 2001-2003 (-49pc): just a long slog, with failed rallies.
For now, the markets are flashing a tactical buy signal. Mr Draaisma's "capitulation indicator" has crashed to the lowest level since the 1998 LTCM crisis: the share "valuation indicator" is near an all-time low.
Thursday, March 6, 2008
42.
Tuesday, October 23, 2007
Subprime collateral damage.
Wow. The whole article by Stephen Roach is very thought-provoking. The only caveat is that consumer slowdown in the US has been predicted unsuccessfully for the past few years. Never bet against the American consumer. But the consumer only has to slow down once to disprove this notion. The absence of a black swan does not preclude it's existence.
Will it happen? I think so. $100 crude might just do the trick.
From John Mauldin:
As always, the cycle of risk and greed went to excess. Just as dot-com was the canary in the coalmine seven years ago, subprime was the warning shot this time. Denial in both cases has eerie similarities - as do the spillovers that inevitably occur when major asset bubbles pop. When the dot-com bubble burst in early 2000, the optimists said not to worry - after all, Internet stocks accounted for only about 6% of total US equity market capitalization at the end of 1999. Unfortunately, the broad S&P 500 index tumbled some 49% over the ensuing two and a half years and an over-extended Corporate America led the US and global economy into recession. Similarly, today's optimists are preaching the same gospel: Why worry, they say, if subprime is only about 14% of total US securitized mortgage debt? Yet the unwinding of the far broader credit cycle, to say nothing of the extraordinary freezing up of key short-term financing markets, gives good reason to worry - especially for over-extended American consumers and a still US-centric global economy.
How all this plays out in the global economy in the years immediately ahead is anyone's guess. I have long framed the tensions shaping the outlook in the context of "global rebalancing" - the need of a lopsided world economy to wean itself from a US-centric growth dynamic. A partial rebalancing now appears to be at hand - likely to be led by the coming consolidation of the American consumer. That is painful but good news for those of us who have long worried about the destabilizing risks of a massive US current account deficit. But a more complete global rebalancing is a shared responsibility - one that must also be accompanied by an increase in domestic demand from surplus-saving economies elsewhere in the world. To the extent that doesn't happen - and, as underscored above, that remains my view - then a asymmetrical rebalancing dominated by slowdown in US consumer demand should take a meaningful toll on global growth.
It is high time for monetary authorities to adopt new procedures - namely, taking the state of asset markets into explicit consideration when framing policy options. Like it or not, we now live in an asset-dependent world. As the increasing prevalence of bubbles indicates, a failure to recognize the interplay between the state of asset markets and the real economy is an egregious policy error.
I never thought about collateral damage from subprime. Subprime related losses are estimated to be upwards of $240 billion, excluding any collateral.
Inflation targetting by the Fed, is probably worth another post.
Valuations in emerging markets have reached an interesting crossroads. Economist came out with an article which suggested that 2008 for emerging markets might be like 1999 for tech stocks. You can make a fortune off a bubble. I would like to believe that markets like Taiwan, Singapore and India will one day resemble a bubble valuation (with PEs in excess of 50s). At a PE of around 25 with operating earnings growth of 30%, we have some ways to get there.
Enjoy the party while the music is loud.
