Paulson's credit hedge fund soars
Big beneficiary as spreads widen on other hedge funds' woes

Paulson hedge fund soars in June; subprime bets pay off again - MarketWatch

Paulson is talking one story and doing the opposite

“We think that people who had been refinancing their credit card debt into home equity loans are finding that harder to do now,” Wyss said. That would explain part of the big rise in credit card borrowing in May, he said.
Wyss said another factor was a strong gain in retail sales in May, which shot up by 1.4 percent, the largest jump in more than a year, as consumers brushed off rising gasoline prices to storm the malls.”

“But economists believe strength in employment and consumer spending will help provide a stronger performance in the April-June quarter, with many looking for the gross domestic product to expand at a rate of 3.5 percent or even better.”

Yeah, those new “hospitality-” and retail-jobs and credit card spending will ensure continued prosperity….

Interesting article banker.

You wrote:

The junk market is what drives the LBO market to the levels we are seeing. The leveraged loan market has never been what cracked first. Of course, I suppose this time could be different.

What cracks first, in your opinion? Please explain.

I have a little experience with PE/LBO and what I've seen is that by the time the 'grace period' provided by the initial funding runs out the companies really need to be cash flowing... both to support the operations as always & also the additional debt load. If they can't cash flow - the plan falls apart pretty fast.

But if they are able to cash flow nicely - then a resultant flip (resale or stock float) follows naturally.

So even if the credit spreads widen - it will affect future LBOs but the existing crop of already done deals shouldn't get in immediate trouble, operationally, unless and until there is a cash flow issue with those individual firms.

But it does complicate the PEs planned future exit strategy on these already done deals as higher spreads reduce the attractiveness of the deal for the next owner...

So it then becomes another case of 'sticky pricing' as the PEs are likely to hang on & not cut price as long as the firms they operate/own continue to cash flow. Yes/no?

And for those who aren't aware, there are a lot of PE acquired LBOs operating out there already - more than you would think.

BHP said to eye Blackstone for Alcoa

The No. 1 mining company reported in talks with private equity firms for $40 billion bid for U.S. aluminum company

CNNMoney.com: 404 Page Not Found

Credit spreads are, with a few exceptions (subprime being the obvious one), still very tight and just a touch off their all-time lows. I thought the subprime CDO mess and the prospect of record issuance over the next couple of months would have started to push spreads out, but that hasn't materialized in a significant fashion as of yet. It almost feels to me like the junk market just decided to take the first couple weeks of July off, to go to the beach before the onslaught begins. Auto part manufacturer paper has been another area of weakness of late, so the 20 billion or so Chrysler needs to issue soon for its LBO could be the next flash point for the credit markets. There is going to be so much junk debt on offer over the next couple of months it's hard to believe the market can absorb it all without some sort of significant price concession, it at all.

small business owners less optimistic.

NFIB | Small Business Association

Owning a home is a dream gone bad for many

Q: Has the problem affected only people with low or moderate incomes?

A: Oh, it's not restricted just to low-income people, by any means. I would say the problem was straight across all income levels. And it is spreading. We are in a wave right now because these home loans are adjusting in waves. That's why it is not as bad as it could be. It's not all happening on one single day or time. That helps it to be somewhat manageable for consumer credit counselors and other agencies, but I know there's a strain on many organizations.
Owning a home is a dream gone bad for many - Orlando Sentinel

612 subprime bond classes put on negative credit watch - that should put some pressure on credit spreads. Also seeing a reasonable flight to quality bid so far this morning. Of course the hot money hasn't called in from the yacht yet this morning, so we'll see if this continues or not.

johnson redbook retail sales index up 0.8% yoy

S&P's entire news release is a total shocker. This is going to crush ABX and some CDO. S&P said it was changing its loss severity to 40% from 33%.

Data quality is fundamental to our rating analysis. The loan performance associated with the data to date has been anomalous in a way that calls into question the accuracy of some of the initial data provided to us regarding the loan and borrower characteristics. A discriminate analysis was performed to identify the characteristics associated with the group of transactions performing within initial expectations and those performing below initial expectations. The following characteristics associated with each group were analyzed: LTV, CLTV, FICO, debt-to-income (DTI), weighted-average coupon (WAC), margin, payment cap, rate adjustment frequency, periodic rate cap on first adjustment, periodic rate cap subsequent to first adjustment, lifetime max rate, term, and issuer. Our results show no statistically significant differentiation between the two groups of transactions on any of the above
characteristics.

In other words, the underwriting stunk so badly that no one knows what these loans are going to do.

Chain Stores vs. Redbook

Retail sales picked up in the July 7 week, the bottom line of an ICSC-UBS report that offers a rare bit of good news on the retail sector. Week-to-week sales rose only 0.1 percent but the year-on-year pace of 2.4 percent is very respectable, reflecting what the report said is better consumer traffic, better consumer confidence, and drier more helpful weather. The report stressed that levels are still modest but are improving and are showing the most consistent strength in three months. Redbook's report, which is also for the first week of July, will be posted at 8:55 a.m. ET. Today's data won't affect expectations for Friday's retail sales report which covers the month of June.

Redbook, in contrast to ICSC-UBS, is reporting weak store sales, with year-on-year growth at a paltry 0.8 percent in the July 7 week. The reports taken together indicate soft sales at best, consistent with company news from the sector which have been mixed at best. Just this morning Home Depot, out of the suffering home products category, lowered estimates. There's a lot more retail news this week with a run of chain stores to report June results on Thursday and of course the Commerce Department to issue retail trade data on Friday.

VIX and VXO are getting jumpy as well, and the yen is rallying sharply. This all "fits" with "Oh crap!" trading -- or in other words, risk getting repriced quickly. Maybe it's nothing. But you gotta keep your eye on all these things. They could be "footprints" of something larger, some kind of real credit stress. As always, we'll see ...

Incognitus: the bloody characteristics do not include whether the loans were "Stated Income"?? I bet they'd find a GOOD deal of difference if they included it.

No, they don't. I've been telling people for years that this has been an exercise in plausible deniability rather than actual analysis.

The funny thing about the release is that they are not analyzing using the factors that do seem to be predictive. I made myself up a matrix about 7 months ago that seemed to be working well (a lot better than theirs, anyway). It used mostly geo factors and regional factors (affordability, new/existing, etc.) That's because when you state or don't verify, LTV, DTI and such like have no relation to reality, and FICO scores are easily manipulated and mean nothing if you don't have a DTI that's reasonable. Nor do verified assets offer you much if the borrower didn't invest their own money and is in a no-recourse loan. Why wouldn't they let the lienholder take the loss when they are down more in the home than their annual after-tax income?

However my models have now blown to predict unbelievably high losses after 60 day default or the second 30 day in some areas. What pushed it over were average list price declines in the west. I hope I'm wrong; my models show that Alt-A will be producing worse losses than subprime in some areas. If you modify reset terms enough to take a chunk out of 60 day plus defaults, you take a big chunk out of cash flow on the portfolio. I am not sure that is being accounted for properly in many of these models.

Also I've got a terrifyingly long tail on my simulations, meaning that the uncertainty going forward after 12 months is very high and the probability is that many seemingly relatively safely collateralized loans with high DTIs being made now are going to blow 2-3 years down the line.

Not only are wholesale sales figures quite good (even if you leave out petroleum, where prices distort the result badly), but the inventory ratio is plunging. Inventory restocking is going to provide a floor for some parts of the economy, while the financial sector sorts itself out.

I think it's clear that business has been expanding at a fairly healthy pace, and I think this report is representative of that. The question is whether businesses are gearing up to serve some US super-consumer that no longer really exists.

I think it's worth reiterating that recessions are frequently about excess business growth as much as anything else. It's analagous to constructing a building that is larger that the materials you're using can support - more isn't necessarily better.