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George Parr on Subprime
YouTube -
Brilliant! Stops being a package of dodgy debts and becomes an SIV. What makes it attractive? It's the name of the hedge fund. I'd buy anything that says enhanced! Financial meltdown can be avoided. Reward the ingeniuity of the market.
I live in home in Las Vegas that I am renting from a person who bought it in March 2006 as an investment. She lives in CA and probably thought it was cheap (which it was, relative to CA).
Its a 3-br, 1741 sq.ft. SFR. Decent home, lawn, etc.
I rent it for $1590/month. I saw the mortgage bill it was for $2800+/month. Fixed rate. Im just waiting to see a For Sale sign put out front.
Built new in 2003.
May 2003 original sales price: $188,300 ($108/sf)
March 2006 sales price: $368,000 ($211/sf)
Current estimate (per Zillow): $284,000 ($163/sf)
2007-2008 taxable assessed value: $399,603 (!!)
The March 2006 to current drop is 23%. I figure a reasonable 2008 market price is $131/sf, which is a 4% nominal annual return on the original 2003 sales price. That translates to $228,000, representing a 38% drop from the 2006 sales price peak.
With the conditions in place for prices to overcorrect, it could get even uglier. Look at that Florida home from a few posts back we could see a lot more of those.
Yet the ABX indices and financial stocks continue to stablize and rebound.
The main guy in the first Bloomberg article about SIVs affecting Public School Funds was named Hal Wilson. Here is what he said on Nov 15
"" Nov. 15 (Bloomberg) -- Hal Wilson smiles at the blue numbers on his desktop screen. His money is yielding 5.77 percent. For the chief financial officer of Florida's Jefferson County school board, that means the $2.7 million of taxpayer funds he's placed in the state's Local Government Investment Pool is earning more on this October day than it would get in a money market fund.
And Wilson says he knows the Florida officials who manage the funds of the 1,559-student district have invested them wisely.
We're such a small school district,'' Wilson, 55, says.We don't have the time or staff for professional money management. They have lots of investment advisers. It's risk free and easy.''
Here is what he said today after his funds were frozen.
"`We are in the process of working out provisions of a short-term loan with our bank to cover the overdrafts that will occur in our payroll account today,'' Wilson said."
The other issue hanging out there that was buried in the Florida story was an information request from S&P regarding whether any funds for debt service were in the locked down fund - munis anyone?
Hi,
Can anyone comment on the safety of investment contract pools which are comprised of GICs, BICs, Stable Value Pooled Funds, Separate Account and Synthetic Investment Contracts. These are commonly offered by state retirement plans and offer money-market type yields of around 4.75%.
Just two days ago I told a friend that I didnt think the government was a contributor to the current problem with subprime etc. Negligent perhaps, but not directly involved with any collateralizing of the mortgages. I never even thought they might be involved on the other end of the equation.
energycon: Why would somebody essentially LEND THEMSELVES MONEY? answer: becuase the interest rate is great.
OT: I have noticed the Google Ads are still full of mortgage offers on your site.
I hope you don't mind CR but I click though them every chance I get. Want to keep up on who is lending you know.
WorriedSaver,
FDIC insured money market accounts yield more than 4.75%. Are they not offered with your manager? I'd stay away from things labeled "synthetic" until people figure out how it gives them the inevitable strange disorder...
Ministry of Truth in the hay-day those were some of the most expensive keyword to buy if my memory serves me correctly it was close to $15-20 a click... I wonder how rapidly that deteriorated...
The weekly Fed data on Commercial Paper is posted here
.
ABCP is cliff-diving. It looks like nobody is buying ABCP. Nobody.
Imagine all the phone calls between City Managers, county gov't types and the folks that run these various funds not to mention the endless number of gov't districts such as school and fire. My guess is that safety and liquidity will have new meaning in the weeks and months ahead.
"In addition to potential "bank runs" on these funds, another key concern is if other funds stop investing in asset backed CP - making the credit crunch worse." - CR
CR, I think that statement has its own answer implied in it. If you have to ask if it's a concern, it's probably already happening.
We are going to see some pull back of public and private funds from ABCP. People have been burned and it is going to take some time for the pull back and over-reaction to run its course and people start to trust the instruments and institutions again, just like what happened in the aftermath of the dotcom, S&L, and junk-bond debacles.
IMHO, it is not so much a question of if, but in what manner and how much - Will it be a fast bloody crash (with "bank runs") or slow painful deflating of the balloon. Hopefully it will be the latter with authorities and responsible parties having a little foresight and organizing a general clean-up of the mess helping restore the vital trust that is needed for the system to function (such what happened with the S&L RTC).
Chuck,
The ABCP contraction for the month of November (through the 28th) was second only to the first month of contraction in August, it was actually larger than the September contraction with a few days left in the month of November.
Florida Schools Struggle to Pay Teachers as Investments Frozen
By David Evans
Nov. 30 (Bloomberg) -- School districts, counties and cities across Florida are scrambling to raise cash after being denied access to their deposits in a $15 billion state-run investment fund
Florida Schools Struggle to Pay Teachers Amid Freeze (Update4) - Bloomberg.com
From a regulators perspective, the least unpalatable choice between sudden correction and slow deflation would be the latter. e.g. let's do it Japan style, if we can get away with it. The general pattern over the last several weeks suggests this could be the case. However, the risk that things could get seriously out of hand has increased.
I am of course interested in Sebastian's take on this, just to keep the discussion fair and balanced.
From Barley's link to Bloomberg: "This situation points up the need for monies held in trust by local and state governments to be subject to searching due diligence and constant risk assessment", said Harvey Pitt, former chairman of the U.S. Securities and Exchange Commission.
True enough. But the governments had a right (at least theoretically) to assume that the regulators and rating agencies would behave responsibly. To require a school board member to see through a putative investment grade bond to the toxic waste two or three levels below is asking a bit much, don't you think?
Yeah, need more Sebastian. Feeling worried.
Ive been told to pull all my money from SBA as soon as I can and to never use them again, said Port St. Lucie Finance Director Marcie Dedert. Port St. Lucie has $426 million remaining in the investment fund, the largest balance of any Florida city.
Dedert, whose most recent deposit into the pool was Wednesday, said she has only about $30 million on hand to pay the citys bills and is liquidating all available accounts. She said she hoped the state would let the city make some withdrawals to pay employees and make debt payments.
All our excess cash is there, she said. Im robbing Peter to pay Paul.
The public officials involved with these funds are fiduciaries. They have to make sure the funds are invested wisely and they can't rely on the state fund to do due diligence. But from a practical point of view, there's a big difference between Dade County and Jefferson County. Dade County can afford to hire an investment consultant for DD. Jefferson can't. A $2 million investment for Jefferson means as much to them as a $200 million investment for Dade. In Dade, you are just a faceless bureaucrat. But in Jefferson, you know everybody whose money you lost and many of them are friends or relatives.
In rural places all over the U.S., fiduciaries are not sleeping well.
Flashback: "I rent it for $1590/month. I saw the mortgage bill it was for $2800+/month. Fixed rate. Im just waiting to see a For Sale sign put out front."
That shouldn't be your only worry. Keep an eye peeled for foreclosure evidence, and have a Plan-B ready. I, too, rent from an individual, and that's what I'm doing.
I google my rental house address every week, if you hit the foreclosure rolls it will pop up there.
But, but, but the mkt was supposed to go up 300+ pts today?! today was the greatest short squeeze i have witnessed. too bad i didn't bite.
i will tell u now, these boys are running out of ammunition. we may be headed down from here.
has anyone else noticed the marked decrease in volatility vs. August? i'm convinced its b/c the quant funds have turned off their computers after we bears fleeced them in the summer.
human traders will do everything contrary to what u think to confuse and then fleece u.
idoc,
you should max out your shorts.. there's no way the market will go anywhere but down these last 30 minutes. It's a lock!
(sarcasm off)
Dollar cost average the puts.
Something tells me that the Xmas shopping season may not be crazy gangbusters if govt employees don't get paid.
But maybe govt agencies can hand out credit cards to their employees instead...
A measure of US business activity expanded more than expected in November, as employment and production rebounded. Chicago PMI up to 52.9 from 49.7.
Manufacturing continues to be strong and healthy. Again, the housing slump shows no sign of follow-thru in the general economy. But I understand Montana public money management fund problems clearly outweigh the strength in manufacturing
O-Joe
idoc,
what do you short ?
here is my list:
DSL
FED
FHN
MBI
C
STT
STI
HRB
ZION
WFC
do you have good suggestions that are not already down 40%-50% ?
Economist - Dog days of winter... How long will banks worry about liquidity?
Premium content | Economist.com
Come on people, wake up and smell the coffee. Never enter into a land war in Russia during the winter, never stand in line to buy real estate and never, ever, ever buy the soup du jour from wall street. Wall street sells what has been selling because its easy and profitable for them, not you. Call it the Tickle Me Elmo theory. There is nothing wrong with stocks, bonds or real estate unless they are over-priced. If wall street has been selling lots of it recently you can be sure its over-priced. Only wall street could engineer a massive swindle on simple no-brainer assets like houses and very short term supposedly AAA liquid money instuments.
Yal
first 4, in and out of C, STT. never shorted last 4. stay with small to mid range banks. the pain will come w/o any direct bailouts or super sewer. hang on to FHN; i think u are only down a bit from when we last talked.
we're very close to another good entry point.
This sounds important:
Moody's Says Citigroup SIV Debt Ratings Under Threat (Update3) - Bloomberg.com
Yal
look carefully at GRMN and AMZN
Sorry to say but dollar is
Weekend at Bernie's.
Weekend at Bernie's (1989)
Ps. Gamma also agrees.
"Moody's Cuts or Reviews $72.7 Billion in Citigroup SIV Debt"
Where's a Super-SIV when you need it?
Pretty brutal week, in the free market capitalist system.
I think the fund manager desire to dress up their clients' statements won out over the economy. That fuel for the bull market won't be there next week. Only Ben and santa left.
has anyone else noticed the marked decrease in volatility vs. August?
idoc | 11.30.07 - 3:22 pm | #
Yeah! Excellent observation! Since Oct 12 the implicit volatility was registering lower highs while stock prices were falling. This was one of many signals that brought me to close my shorts last week.
The inverse is also true, to short one should wait for higher lows of the implicit volatility.
EWZ
Hilarious, almost.
Yesterday, OFHEO reported the second largest decline in quarterly home prices on record. Tuesday, Case Shiller showed continued ugly declines in home prices. Some time ago, we saw ugly stats on home vacancies.
Don't worry, though; all is well: real outlays on housing services, 14% of personal consumption expenditures, were UP in October, per BEA:
http://www.bea.gov/national/nipaweb/nipa_underlying/TableView.asp#Mid
Unbelievable.
After today, I am a bit worried about my long positions and I feel ok about puts on banks, homebuilders and retail. If "leadership" is shifting from energy, gold and tech to financials and real estate, just how far can these new leaders lead? I was worried about a short position on Russell 2000 futures when they opened at up 2% but I made the right decision to sell more and the position is a winner by the close. I thought that my JC Penny puts should have been sold earlier, but JCP was in the red, at least the last time I looked. Looks like the Fed is really running out of ammunition faster than anyone expected. I have been expecting a bounce up to 13800 on DOW, but after today, the question is what sectors will lead the way?
We've always heard here that a FED cut leads to:
a) higher gold and oil
b) lower US$
Now the next FED cut is official and the US$ rallies while gold & oil break down. What happened to the bear mantra?
O-Joe
Financials up 5+% this week.
Most ABX indices up 10+% this week.
CMBX spreads down huge this week.
Very bad week for the bears.
Hear a lot of Hedgies started to buy higher rated subprime tranches on the assumption that the sell off in those AAA tranches is overblown - that appears to be the latest "smart money" play.
Seems like a risky bet given the downgrades. Who knows - but there is a lot of money moving to that trade.
Paulson's plan will help many of these issues avoid default if it happens. Could definately save the bond insurers which probably isn't a bad thing.
Won't keep us out of a recession though - neither will Fed rate cuts.
Nonetheless, this may be the type of market that buries both the short term bull and short term bear. Its been too easy for too long.
O-Joe
Your an idiot. You gonna lose all you money with stupid talk like that.
i'm still thinking about some of the consequences of the Brilliant Paulson scheme. Say I'm a bank president and I decide I need to sell off some loans, that were previously unimpaired, because the borrowers were making payments on time. Now borrowers got this sweetheart deal where they will be paying 2% for 7 years. How impaired are these loans now, and how can I move them off my books? Talk about a credit lockup.
Most ABX indices up 10+% this week.
Isn't this bad for GS and the other 100 thousand who claim to have shorted ABX?
Imagine all the phone calls between City Managers, county gov't types and the folks that run these various funds not to mention the endless number of gov't districts such as school and fire. My guess is that safety and liquidity will have new meaning in the weeks and months ahead.
The cities, counties and school districts have equity (tax receipts, etc). They want to park those funds until they are needed for payroll, debt service, rents, supplies, etc. Where the hell do they park that equity such that it won't be sought out by questionable paper ?
How many banks out there are so solid that you would trust your funds there ? Where should they put it (and have day to day access as needed) ?
Up until this week, it was "where can we get the best return and offload the risk to the guy in Tallahassee". That way of doing business is about to stop. Now we have 67 counties, 67 school districts, half dozen water management districts and some number of city governments... all about to replicate the same investment decisions.
Anonymous,
I don't know what ABX and CMBX indexes you're looking at. Not the same ones I'm looking at on Markit. They're all in the toilet, almost all near bottoms as of close today.
Why don't you back up your anonymous data with some ammunition?
citibank SIVs downgraded;
Moody's Says Citigroup SIV Debt Ratings Under Threat (Update3) - Bloomberg.com
If I'm a municipal fiduciary and I'm pulling money out of funds like these...where do I go? What is my alternative? Are there really mortgage free/agency free etc funds? Straight Treasuries I suppose.
O-Joe
Your an idiot. You gonna lose all you money with stupid talk like that.
Anonymous
The way you tlak you must have lost yours this week already.
O-Joe
I've read every comment - and after all is said and done, I'm still transfixed by Maria Bartiromo's lips.
"Manufacturing continues to be strong and healthy..."
O-Joe
Optimistic Joe | 11.30.07 - 3:43 pm | #
Which reminds me, I think I'll head down to my local cheeseburger manufacturing plant and pick up a little dinner.
The knowledge imparted to me by CR and many of the posters on this wonderful blog has allowed me to have a measured distance from this impending mess (plus it's allowed me to earn a little cash from some ETFs). However, when I see a post like the one about King County (Seattle, where I live), that distance vaporizes and I get a little scared. My daughter is quite content in her public school here; I'd hate to see the greed of others impact her in a negative way. Perhaps I'm overdramatizing something, perhaps the schools and other services here won't be affected negatively, it was just a post that got me thinking beyond the abstract and to the concrete problems this mess will cause.
market bounces like this are expected. one year ago the HB's bounced upwards for almost 6 mo before tanking again. look at a weekly chart for any financial u want and u will relax.
RE Bear -
Yeah, its bad for anyone who shorted the ABX, but if you think any investment bank or commercial bank is better off if the ABX goes down you're crazy. Even GS will do better if the ABX goes up - they still have a huge net long exposure to credit and their shorts are only a hedge to offset some of the pain. If the ABX goes up, its good for financials and that's what happened this week. The guys who got hurt were those with net short positions - that's certainly not any bank or investment bank.
The hedgies that have gone heavy short are hurting bad this week - but most of them have done just fine this year. They're due to give some back.
OJoe
watch what happens to those commodities when the Fed actually cuts.
btw, how's your hedge fund doin?
BillD, I am asking the same question.
The (ring)leaders today were the financials and the homebuilders.
That's just a classic snapback or short squeeze, however you want to call it. No way these sectors lead us longer term; homebuilders are going bankrupt and banks are looking at years of sub-par profits, in part thanks to stooge numero uno (Paulson.)
The real leaders of the last rally (aug - oct) are still breaking down.
RIMM, AAPL, GOOG down today.
Looks like the Santa Claus rally is over, hope you enjoyed it.
rich, I think the ABX is indeed up this week pretty much across the board. It may be a head fake since the remittance data deterioration rate apparently stabilized, but I don't know how to easily get that information. It could also be profit taking ahead of a next leg down.
You have to hand it to the Clinton campaign, they really know how to get publicity.
Rich -
What are you talking about?!
Look at the prices for the indices not the charts - the charts get updated weekly - the prices are real time. Almost all the indices are significantly stronger.
The facts are what they are - don't get mad at me. I'm not too thrilled about it either.
some brutal stuff in that updated Citi Siv story:
Centauri Corp., the largest SIV run by Citigroup with $16.9 billion of debt, had its P1 commercial paper rating placed on review for downgrade as well as its AAA medium-term note program, Moody's said. Centauri's net asset value dropped to 60 percent from 85 percent since Sept. 5, Moody's said.
Beta Finance Corp., the second-largest Citigroup SIV with $16 billion of debt, had its senior debt ratings placed on review for downgrade after its net asset value declined to 60 percent from 87 percent, Moody's said.
Links Finance's net asset value declined to 78 percent from 94 percent since a Sept. 5 review, Moody's said. The SIV's AAA ratings may be cut after a review that will be completed within a week, Moody's said.
18.25 P/E on the S&P 500 as of Oct. 31.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,5,11,0,0,0,0,0.html
I look forward to that calculation being updated with the latest earnings figures.
Sebastian, how high will the P/E go? Must be an indicator of great strength!
Look at the prices for the indices not the charts - the charts get updated weekly - the prices are real time. Almost all the indices are significantly stronger.
Anonymous,
yah.. i was just checking out the ABX stuff myself and noticed the discrepancy in the "price" and the chart.
Looks like the news of the "Hope Is Not A Crappy Hedge" thingy got people chilled out about insuring against defaults.
Place your bets on whether this is temporary or if this is the end of the end.
Anon,
GS was negating their supposedly mark to market losses on high risk bonds using gains from ABX short. Since high risk bonds are still not traded, any gain in ABX should be a loss for all those who hedged.
Unless GS found something else to short or they are getting 'better' bids on those high risk bonds.
Eli -
Yes, that's the big bet. Definately seeing buying interest in the higher rated paper. That rally could have some legs. But who knows.
The lower rated stuff is complete garbage though - although it seems to be priced that way. The CMBX on the other hand is priced pretty thin if you see commercial real estate going into a downturn. If you see a replay of residential in commercial shorting the CMBX - particularly the A and BBB rated securities is an interesting play.
To be honest, I see the financial stocks going down much further over the next 6 months, but the ABX indices are so heavily shorted things could be pretty volatile there.
RE Bear -
You're correct that their hedge is definately not a perfect match to their book, but the securities traded up as well as the indices.
Look, I'm no huge fan of any financial, but the fact is they'd all rather see credit improve than deteriorate.
This week credit improved - mostly in the MBS and ABS universe. Corporate credit on the other hand aint so good...
but the securities traded up as well as the indices
Thanks Anon. I didn't know that.
The (ring)leaders today were the financials and the homebuilders.
Take it as a sign that we're in a secular bear market. In a secular bull market, the primary trend is up with sharp snap backs (corrections). In a secular bear market the primary trend is down with sharp rallies.
OJoe
watch what happens to those commodities when the Fed actually cuts.
btw, how's your hedge fund doin?
idoc
I'm not sure about when gold & oil will start there big breakdown or if it has already started. Maybe we'll see one more bounce. However, when they tank they tank very violently as we've seen in the past.
I have nothing to do with a hedge fund, BTW. Always open for job interviews, though
Just kidding.
O-Joe
Very safe level. P/E was 20 in 1929 before the crash, the whole 1.75 points more!