The media, which couldn't do enough to bury the GSEs a few weeks ago, can't publish stories about why equity and preferred investors may not be wiped out fast enough. Even Dow Jones, which had been actively trying to implement a self-fulfilling prophecy to wipe out GSE investors, has published articles which accurately detail the dangers of wiping out GSE investors.
Wiping out GSE preferreds would cripple banks. Banks own GSE preferreds because they only need to take a 20% capital charge versus 100% for corporate fixed income investments. Banks can also take advantage of the 70% dividend received deduction feature found with traditional preferred equities. Imagine the reaction of Ben Bernanke and FDIC Bair if banks were forced into failure by wiping out preferred holders to meet some moral criteria and to save a paltry $2 billion?
Would the exception of some wavering earlier this week out of fear that the self-fulfilling may come true, I had the GSE situation pegged correctly. This has led to some sour grapes among my peers and, even, some colleagues. To these people I say: Get a clue. All the analytical training in the world and all the nuance language is now substitute for in the trenches Wall Street experience and common sense!
Friday, August 29, 2008
Monday, August 25, 2008
It's Getting Better All The Time
A few days ago I was depressed. Moody's downgraded the GSE preferreds five notches and I thought the rout may have been on. However, positive comments from a Wall Street research department and guests on CNBC (whose positive comments stunned the muckraking hosts) stabilized the GSE preferred market.
Even the most ardent GSE basher and nationalization advocate has to consider the repercussions of wiping out preferred investors when many regionals and major banks, such as JP Morgan, are loaded up with GSE preferreds. This is in addition to insurance companies such as Safeco and Allstate and pension funds such as TIAA-CREF.
Of course, the new spin is that firms such as JPM will have to take substantial writedowns because of GSE preferred positions. The fear-mongering is gearing up for another round of "Frighten Investors" The difference between GSE writedowns and CDO / SIV writedowns is that there is a good chance that, in the -not-too-distant future, investors in GSE preferreds wil be writing them up. Many, if not most, CDOs and SIVs are not going to be written up appreciably as the collateral within has defaulted. It is cents on the dollar for these puppies.
Whether or not you agree with Fed Chairman Bernanke, he has been successful, thus far, in stabilizing the banking system. Letting the GSE preferreds implode or even just suspend dividends would undo much of Mr. Bernanke's work. I can imagine him on the phone with Hank Paulson begging him not to wreck the financial system.
Fortunately, not only does Mr. Paulson not want to take over the GSEs, he cannot do so without their consent. Lets get past this nationalization talk, for now.
Investors have really been through hell during the past 12 months. From AAA-rated mortgage-backed securities, to auction-rate securities to the GSEs, investors have been hammered from some unlikely corners of the market. For these investors I have good news. It will get better.
It will get better, but investors should manage expectations. It took six years of accommodative Fed policy to cause the housing / credit bubble. Hubristic strategies and decisions made by academically-gifted people evolved over time. It is going to take a long time, possibly years, for another group of academically-gifted people to work the markets out of this mess (I would do nearly anything to have old-time traders back in charge).
Investors should also manage expectation as to how robust the recovery will be. Brokers and banks are not going to approach earnings levels seen during the past several years. I am not just talking about profits, but also revenues. Home prices will stabilize and gradually recover, but they are not returning to their cheap money / no documentation levels any time soon.
As with the tech bubble, investors reminisce and call for a return to those halcyon days when 401Ks would rise 20% or more per year. That wasn't real. That was too many investors trying to get in on the action at once. When they all raced for the door on the way out, the boom turned to bust. That happened with the credit bubble and, to a lesser extent, the recent commodities bubble.
Nearly all bubbles have fundamental origins, but enthusiasm takes over and asset prices spiral out of control. Bubbles can also work in reverse. There is no way that the significant problems in the financial sector justifies the trading levels of their preferreds and some of their bonds. Investors with the stomach for volatility can pick up bargains.
Many readers have asked me about the safety of senior GSE debt. This debt has an implied government guarantee which would only be strengthened in the unlikely event of a GSE nationalization. The fear-mongers tried to scare investors by stating all could be lost for the GSEs if they cannot raise money to fund their mortgage businesses. Last week, FRE came with a $3 billion five-year note. Today, FNM did the same. Both syndicates were oversubscribed. So much for not being able to raise capital.
Even the most ardent GSE basher and nationalization advocate has to consider the repercussions of wiping out preferred investors when many regionals and major banks, such as JP Morgan, are loaded up with GSE preferreds. This is in addition to insurance companies such as Safeco and Allstate and pension funds such as TIAA-CREF.
Of course, the new spin is that firms such as JPM will have to take substantial writedowns because of GSE preferred positions. The fear-mongering is gearing up for another round of "Frighten Investors" The difference between GSE writedowns and CDO / SIV writedowns is that there is a good chance that, in the -not-too-distant future, investors in GSE preferreds wil be writing them up. Many, if not most, CDOs and SIVs are not going to be written up appreciably as the collateral within has defaulted. It is cents on the dollar for these puppies.
Whether or not you agree with Fed Chairman Bernanke, he has been successful, thus far, in stabilizing the banking system. Letting the GSE preferreds implode or even just suspend dividends would undo much of Mr. Bernanke's work. I can imagine him on the phone with Hank Paulson begging him not to wreck the financial system.
Fortunately, not only does Mr. Paulson not want to take over the GSEs, he cannot do so without their consent. Lets get past this nationalization talk, for now.
Investors have really been through hell during the past 12 months. From AAA-rated mortgage-backed securities, to auction-rate securities to the GSEs, investors have been hammered from some unlikely corners of the market. For these investors I have good news. It will get better.
It will get better, but investors should manage expectations. It took six years of accommodative Fed policy to cause the housing / credit bubble. Hubristic strategies and decisions made by academically-gifted people evolved over time. It is going to take a long time, possibly years, for another group of academically-gifted people to work the markets out of this mess (I would do nearly anything to have old-time traders back in charge).
Investors should also manage expectation as to how robust the recovery will be. Brokers and banks are not going to approach earnings levels seen during the past several years. I am not just talking about profits, but also revenues. Home prices will stabilize and gradually recover, but they are not returning to their cheap money / no documentation levels any time soon.
As with the tech bubble, investors reminisce and call for a return to those halcyon days when 401Ks would rise 20% or more per year. That wasn't real. That was too many investors trying to get in on the action at once. When they all raced for the door on the way out, the boom turned to bust. That happened with the credit bubble and, to a lesser extent, the recent commodities bubble.
Nearly all bubbles have fundamental origins, but enthusiasm takes over and asset prices spiral out of control. Bubbles can also work in reverse. There is no way that the significant problems in the financial sector justifies the trading levels of their preferreds and some of their bonds. Investors with the stomach for volatility can pick up bargains.
Many readers have asked me about the safety of senior GSE debt. This debt has an implied government guarantee which would only be strengthened in the unlikely event of a GSE nationalization. The fear-mongers tried to scare investors by stating all could be lost for the GSEs if they cannot raise money to fund their mortgage businesses. Last week, FRE came with a $3 billion five-year note. Today, FNM did the same. Both syndicates were oversubscribed. So much for not being able to raise capital.
Saturday, August 23, 2008
Et Tu Brute
I reluctantly concede that the other shoe may have dropped on GSE equity and preferred holders. Moody's downgraded the GSE preferreds five notches to Baa3. This could be the final knife to plunge into the GSE heart in what has been a Roman Senate style attack by the media and political pundits. One can only hope that Treasury Secretary Paulson can act like Marc Anthony and avenge the downgrade and the media / pundit attacks. Of course, in the Julius Caesar story, Anthony's vengeance came post-mortem. Let's hope that Mr. Paulson will say something before the dog's of war have their way. Thus far, the Mr. Paulson's silence is deafening.
What should investors do? Mismanagement at the GSEs, miscalculation and relentless attacks by the media and pundits have made GSE equities and preferreds risky (aggressive) investments. This is a sad development. We would be very cautious when owning the regional banks. They are loaded to the gills in GSE preferreds. Bloomberg News reports that Sovereign Bank and M&T bank are among the largest holders of GSE preferreds.
Last year' energy bill allotted up to $25 billion in low-cast government loans for the troubled domestic automakers. Now the Detroit Three are telling the government that $25 billion may not be sufficient. Now, I am a big fan of domestic automobiles. I own a small fleet of vehicles which range from modern daily drivers to race cars to a collector vehicle. All of my vehicles are domestic (I cannot say the same for my children). However, I must join the ranks of critical pundits on the subject of the Detroit Three.
Never mind the GSEs, the Detroit three have been examples of poor management for 35 years. One only needs to look back at product and cost decisions as evidence. When they do take meaningful steps in the right direction, they revert to their old ways of inefficiency as soon as the coffers begin to fill. If the GSEs will be required to blow up their non- implied government-backed investors, To be fair, Alan Mulally has not been at Ford long and is not responsible for the once great marque's decline, but many board members have been there for quite a long time. Cerberus is new to the auto game, but it had better get help quickly.
This leaves the intrepid Rick Wagoner at GM. Rick as been at GM since 1977, rising to CFO in 1992, then to the head of North American Operations in 1994. He became COO in 1998, President and CEO in 2000 and Chairman in 2003. During Rick's time at the top GM became the market leader in trucks and SUVs (essentially 1965 Impala wagons with computers and fuel injection) and, until 2007, agreed to ever-costlier labor agreements. Meanwhile, his foreign competitors thrived (strangely enough without many large trucks and SUVs, built higher quality cars which were more efficient and were less costly to produce IN THE U.S.!
Here are my conditions for more low-cost government loans to the Detroit Three:
1) Wagoner and the GM Board is history.
2) Ford's board is history.
3) Chrysler brings back Bob Lutz and / or Jerry York.
4) Labor costs fall in line with the Detroit Three's foreign competitor's U.S. facilities.
5) As with Chrysler in the 80s, the Detroit Three must make a paradigm shift to new more efficient and high-quality vehicles. Performance and style need not suffer.
6) Stop legislating the automakers out of business with ridiculous emissions, safety and mileage standards. Some semblance of reality has to be exercised by Congress. I am all for safe, clean and efficient cars, but pulling numbers out of a hat and telling the automakers to meet them or else is ridiculous.
Speaking of Congress, before blowing up GSE investors, how about Congress acknowledging their role (lack of oversight) in the GSE situation?
In case you missed it. Th oil bubble has burst and the dollar has strengthened. So much for those who said that oil prices were solely due to demand. Bubbles can and do occur in every market. Caveat Emptor.
What should investors do? Mismanagement at the GSEs, miscalculation and relentless attacks by the media and pundits have made GSE equities and preferreds risky (aggressive) investments. This is a sad development. We would be very cautious when owning the regional banks. They are loaded to the gills in GSE preferreds. Bloomberg News reports that Sovereign Bank and M&T bank are among the largest holders of GSE preferreds.
Last year' energy bill allotted up to $25 billion in low-cast government loans for the troubled domestic automakers. Now the Detroit Three are telling the government that $25 billion may not be sufficient. Now, I am a big fan of domestic automobiles. I own a small fleet of vehicles which range from modern daily drivers to race cars to a collector vehicle. All of my vehicles are domestic (I cannot say the same for my children). However, I must join the ranks of critical pundits on the subject of the Detroit Three.
Never mind the GSEs, the Detroit three have been examples of poor management for 35 years. One only needs to look back at product and cost decisions as evidence. When they do take meaningful steps in the right direction, they revert to their old ways of inefficiency as soon as the coffers begin to fill. If the GSEs will be required to blow up their non- implied government-backed investors, To be fair, Alan Mulally has not been at Ford long and is not responsible for the once great marque's decline, but many board members have been there for quite a long time. Cerberus is new to the auto game, but it had better get help quickly.
This leaves the intrepid Rick Wagoner at GM. Rick as been at GM since 1977, rising to CFO in 1992, then to the head of North American Operations in 1994. He became COO in 1998, President and CEO in 2000 and Chairman in 2003. During Rick's time at the top GM became the market leader in trucks and SUVs (essentially 1965 Impala wagons with computers and fuel injection) and, until 2007, agreed to ever-costlier labor agreements. Meanwhile, his foreign competitors thrived (strangely enough without many large trucks and SUVs, built higher quality cars which were more efficient and were less costly to produce IN THE U.S.!
Here are my conditions for more low-cost government loans to the Detroit Three:
1) Wagoner and the GM Board is history.
2) Ford's board is history.
3) Chrysler brings back Bob Lutz and / or Jerry York.
4) Labor costs fall in line with the Detroit Three's foreign competitor's U.S. facilities.
5) As with Chrysler in the 80s, the Detroit Three must make a paradigm shift to new more efficient and high-quality vehicles. Performance and style need not suffer.
6) Stop legislating the automakers out of business with ridiculous emissions, safety and mileage standards. Some semblance of reality has to be exercised by Congress. I am all for safe, clean and efficient cars, but pulling numbers out of a hat and telling the automakers to meet them or else is ridiculous.
Speaking of Congress, before blowing up GSE investors, how about Congress acknowledging their role (lack of oversight) in the GSE situation?
In case you missed it. Th oil bubble has burst and the dollar has strengthened. So much for those who said that oil prices were solely due to demand. Bubbles can and do occur in every market. Caveat Emptor.
Tuesday, August 19, 2008
"And the man at the back said everyone attack"
The ideologues are out in force attacking the GSEs. Not only are they attacking the GSEs and their irresponsible behavior (a fair point), the ideologues are attacking anyone who advocated not wiping out any and all investors possible (I.E. any investor not owning the AAA-rated senior notes) including Treasury Secretary Paulson. Today's Wall Street Journal states:
"We think Mr. Paulson should already have eliminated managers and private holders as a price of the recent bailout legislation. But if he lets either survive after taxpayers are forced to inject cash, the Treasury chief should be run out of town."
I agree that management has to go. I can also accept that equity shareholders should be wiped out. After all, they had the ability to vote. Management and the resulting mess management created was put and kept in place by the voting equity shareholders. I do not believe preferred holders and subordinate bond investors, who were not part and parcel to ANY decision making whatsoever. In takeovers and privatizations, preferred holders have, traditionally, been treated as very junior creditors. In the case of subordinate bonds, if interest payments are halted, the GSEs would be in technical default and bondholders could force an involuntary bankruptcy upon the GSEs. It would be appreciated if the ideological sensationalists would get their facts straight.
Maybe some of these pundits who are beating up the GSEs should be investigated for manipulation. It is interesting how the rhetoric was ramped up after the short sale restrictions were lifted. Hmmmm.
"We think Mr. Paulson should already have eliminated managers and private holders as a price of the recent bailout legislation. But if he lets either survive after taxpayers are forced to inject cash, the Treasury chief should be run out of town."
I agree that management has to go. I can also accept that equity shareholders should be wiped out. After all, they had the ability to vote. Management and the resulting mess management created was put and kept in place by the voting equity shareholders. I do not believe preferred holders and subordinate bond investors, who were not part and parcel to ANY decision making whatsoever. In takeovers and privatizations, preferred holders have, traditionally, been treated as very junior creditors. In the case of subordinate bonds, if interest payments are halted, the GSEs would be in technical default and bondholders could force an involuntary bankruptcy upon the GSEs. It would be appreciated if the ideological sensationalists would get their facts straight.
Maybe some of these pundits who are beating up the GSEs should be investigated for manipulation. It is interesting how the rhetoric was ramped up after the short sale restrictions were lifted. Hmmmm.
Wednesday, August 13, 2008
Myth Busters
During the course of my ever busier work days, I am confronted with all kind of investment (in some cases, conspiracy) theories. Let's address some actual theories put forth by investment advisers.
1) Bank are issuing non-cumulative preferreds because they can "get away with it."
Okay, let's be clear. It is in an issuers best interest to issue cumulative trust preferreds which are 1099-INT reporting as they can write the interest payments off at tax time. This is why over 90% of the preferreds issued since 1993 have been a form of trust preferred. Companies do not issue non-cumulative preferred securities with the idea that they may need to eliminate the dividend. That is asinine as doing so will exclude one from accessing the capital markets. The reason why issuers are coming to market with traditional non-cumulative preferreds is that companies are full up in their Tier-2 debt capital buckets. They need to come to market with dividend paying Tier-1 to maintain capital ratios even though it is more expensive for them to do so.
2) Buying the biggest discount will ensure me the biggest gain when they are called at par.
Hint, the biggest discounts are found with bonds and preferreds which have the lowest coupons and are the least likely to be called.
3) Preferreds trading near par in this environment stand to drop in value more than issues trading at discounts.
Actually, the opposite is true. The higher the coupon, the shorter the duration. The shorter the duration, the less volatile they are when rates rise and / or spreads widen to result in higher yields.
4) When interest rates rise, prices of corporate bond and preferreds will fall.
Maybe, maybe not. It call depends on credit spreads. One only needs to look back over the past year. Interest rates fell (as observed in the treasury market), but yields of many corporate bonds and preferreds in the bank and finance sectors rose. It all had to do with widening credit spreads. As these companies fell on hard times their balance sheets were stressed and they became less creditworthy. The result was that interest rates and credit yields moved in opposite directions. In theory, the opposite should be true during a recovery. Note: Due to balance sheet damage and increased supply of bonds and preferreds, it is unlikely that we will see a return to the record-tight spreads of a few years ago.
5) The Treasury instituted its rescue plans of the GSEs so it could take them over.
This is so ridiculous I shouldn't waste my time commenting on it. There is no upside for anyone (except maybe agency bond and MBS holders at the expense of EVERYONE else) if the GSEs are nationalized).
6) The automakers are too big to fail.
This is 2008, not 1958, 1968 or 1978. The government has its hands full with the banks and GSEs (either of which are more important than the autos at this time).
If investment advisers read real research and used common sense instead of listening to media talking heads, fund managers talking their books and looking for conspiracy theories, everyone would be better off.
1) Bank are issuing non-cumulative preferreds because they can "get away with it."
Okay, let's be clear. It is in an issuers best interest to issue cumulative trust preferreds which are 1099-INT reporting as they can write the interest payments off at tax time. This is why over 90% of the preferreds issued since 1993 have been a form of trust preferred. Companies do not issue non-cumulative preferred securities with the idea that they may need to eliminate the dividend. That is asinine as doing so will exclude one from accessing the capital markets. The reason why issuers are coming to market with traditional non-cumulative preferreds is that companies are full up in their Tier-2 debt capital buckets. They need to come to market with dividend paying Tier-1 to maintain capital ratios even though it is more expensive for them to do so.
2) Buying the biggest discount will ensure me the biggest gain when they are called at par.
Hint, the biggest discounts are found with bonds and preferreds which have the lowest coupons and are the least likely to be called.
3) Preferreds trading near par in this environment stand to drop in value more than issues trading at discounts.
Actually, the opposite is true. The higher the coupon, the shorter the duration. The shorter the duration, the less volatile they are when rates rise and / or spreads widen to result in higher yields.
4) When interest rates rise, prices of corporate bond and preferreds will fall.
Maybe, maybe not. It call depends on credit spreads. One only needs to look back over the past year. Interest rates fell (as observed in the treasury market), but yields of many corporate bonds and preferreds in the bank and finance sectors rose. It all had to do with widening credit spreads. As these companies fell on hard times their balance sheets were stressed and they became less creditworthy. The result was that interest rates and credit yields moved in opposite directions. In theory, the opposite should be true during a recovery. Note: Due to balance sheet damage and increased supply of bonds and preferreds, it is unlikely that we will see a return to the record-tight spreads of a few years ago.
5) The Treasury instituted its rescue plans of the GSEs so it could take them over.
This is so ridiculous I shouldn't waste my time commenting on it. There is no upside for anyone (except maybe agency bond and MBS holders at the expense of EVERYONE else) if the GSEs are nationalized).
6) The automakers are too big to fail.
This is 2008, not 1958, 1968 or 1978. The government has its hands full with the banks and GSEs (either of which are more important than the autos at this time).
If investment advisers read real research and used common sense instead of listening to media talking heads, fund managers talking their books and looking for conspiracy theories, everyone would be better off.
Monday, August 11, 2008
It's Oil Right Now, In Fact It's A Gas.
Back in May, I discussed the oil bubble. I stated that, although increased demand (or its forecast) was the impetus for the rise of oil prices, speculators and dollar hedgers were pushing the price ever higher. Defenders of high oil prices (those with the most to gain from higher oil prices) stated that it was all demand driven. Anyone who has been in trading circles as long as I have (20 years) knows a bubble when they see it.
The reason bubbles happen are due to fear greed and trader turnover on Wall Street which results in a new crop of decision makers every five years or so. These new experts have never seen a bubble before and can't recognize the one they are in until it bursts.
I am most disappointed with Wall Street strategists. Again, many are in their early 30s and have not been through a bubble and could not grasp the reality that prices were driven higher by eager investors looking to capitalize on the oil run.
Unfortunately in this elitist society (mutual fund wholesaler jobs now require MBAs and CFAs) those of use without advanced degrees are ignored for not being qualified in spite of our many years of trading experience. Read Newt Gingrich's editorial in today's WSJ.
The reason bubbles happen are due to fear greed and trader turnover on Wall Street which results in a new crop of decision makers every five years or so. These new experts have never seen a bubble before and can't recognize the one they are in until it bursts.
I am most disappointed with Wall Street strategists. Again, many are in their early 30s and have not been through a bubble and could not grasp the reality that prices were driven higher by eager investors looking to capitalize on the oil run.
Unfortunately in this elitist society (mutual fund wholesaler jobs now require MBAs and CFAs) those of use without advanced degrees are ignored for not being qualified in spite of our many years of trading experience. Read Newt Gingrich's editorial in today's WSJ.
Sunday, August 10, 2008
Don't Stop Believing
Last Thursday, PIMCO's Bill Gross stated that he believed that the Treasury would be forced to bailout the GSEs. I received calls and e-mails from my readers stating their concern that their preferred and, maybe, their subordinate debt holdings owuld be wiped out. Again, sensationalism triumphed over reality.
First, the Treasury and the Fed can lend money to the GSEs without "owning" them. Secondly, Treasury Secretary Paulson (in my opinion the most neutral arbiter in this situation) has explicitly stated that he has no intention of utilizing his powers granted by the rescue plan.
Not one reader heard Freddie CEO Richard Syron's comments on CNBC (30 minutes after Bill Gross) stating that Freddie will not need Treasury assistance. On Friday, Fitch announced that FNMA was a single-A-rated enterprise, at worst, and that preferred dividends should be safe for now. Again, my readers were oblivious to this report. Could it be that readers are looking for disaster and are looking past any positive news? It sure seems as such.
Here is another tidbit of information for you all; Bill Gross is long large quantities of GSE MBS. On Thursday, credit spreads on these securities widened to historic levels. He was getting crushed. If the Treasury nationalized the GSEs, his MBS would have a near-explicit backing by the U.S. Government. By talking down the GSEs, he was talking up his book in an attempt to save his behind!
First, the Treasury and the Fed can lend money to the GSEs without "owning" them. Secondly, Treasury Secretary Paulson (in my opinion the most neutral arbiter in this situation) has explicitly stated that he has no intention of utilizing his powers granted by the rescue plan.
Not one reader heard Freddie CEO Richard Syron's comments on CNBC (30 minutes after Bill Gross) stating that Freddie will not need Treasury assistance. On Friday, Fitch announced that FNMA was a single-A-rated enterprise, at worst, and that preferred dividends should be safe for now. Again, my readers were oblivious to this report. Could it be that readers are looking for disaster and are looking past any positive news? It sure seems as such.
Here is another tidbit of information for you all; Bill Gross is long large quantities of GSE MBS. On Thursday, credit spreads on these securities widened to historic levels. He was getting crushed. If the Treasury nationalized the GSEs, his MBS would have a near-explicit backing by the U.S. Government. By talking down the GSEs, he was talking up his book in an attempt to save his behind!
Tuesday, August 5, 2008
The Gathering Of the Gloom
Yet another fear-mongering article in the NY Times has investors worried about the viability of Freddie and Fannie. If the agenda-laden Times was not so biased against the investor class (which, in reality, includes nearly every working and retired person), one may be apt to take the Times seriously. Unfortunately, even though the article makes some valid points, it is as much hype as substance.
Investors, especially equity investors, should be concerned about the GSEs. Preferred holders probably should not worry as much as some pundits advise. When companies are taken over or taken private, preferred shares are not taken out as are equity shares. Since such shares are usually non-voting vehicles, there is no reason to take preferred holders out. Usually, the preferreds either pay out on their normal schedule, are called if they have reached their first call date and it makes economic sense to do so, or they are tendered for, again if it makes economic sense to do so. The same could (should) be true if the GSEs are nationalized. I say should, not because that is likely to happen, but it is consistent with the private sector and is the right thing to do for investors who do not vote and are, in essence, very junior creditors and not owners of the GSEs.
Although there are reasons to worry over the GSEs, I have made a list of more important things about which to worry.
1) Any local or regional bank. Not only are they exposed to bad mortgages and loans to builders. Many are loaded up on GSE preferreds. This is not to say that the preferreds are not any good, but the price depreciation depletes the banks' balance sheet capital.
2) The entire high-yield bond market. Corporate defaults usually run about 5.00% during "normal" times. They can run over 10.00% during recessions. Currently, they are just over 1.00%. Look for that number to increase.
3) The Detroit Three. All three U.S. automakers are in DEEP trouble, far worse than the GSEs. Their current economic importance (or lack thereof) does not warrant a government bailout. Owning the Detroit three is adventuresome to say the least.
4) Speculating in energy. Is oil going up or is oil going down? The answer to both questions is, yes. The question is when. Don't speculate in commodities unless your convictions are strong.
5) Worry if all of your money is on he short end of the curve. The Fed will be on hold, possibly until this time next year or beyond. Do not count on rolling into higher yields.
6) Hedge Funds: Enough said.
7) Managed accounts, especially fixed income. You are paying 3.00% annually for what?
8) Worry about foolishly selling high-quality munis for fear of the bond insurers. Most munis which were insured never needed to be from an investor standpoint. However, it permitted municipalities to over dramatically lower yields. That's right, insured munis are beneficial to issuers and not investors. The same is true for call features.
9) Worry about getting to and from work safely. All else is moot if you are dead.
10) Finally and most importantly; Spend time with those you love. Rich or poor, employed or not, family is what life is really about. Money can be replaced. The love of one's family cannot.
Investors, especially equity investors, should be concerned about the GSEs. Preferred holders probably should not worry as much as some pundits advise. When companies are taken over or taken private, preferred shares are not taken out as are equity shares. Since such shares are usually non-voting vehicles, there is no reason to take preferred holders out. Usually, the preferreds either pay out on their normal schedule, are called if they have reached their first call date and it makes economic sense to do so, or they are tendered for, again if it makes economic sense to do so. The same could (should) be true if the GSEs are nationalized. I say should, not because that is likely to happen, but it is consistent with the private sector and is the right thing to do for investors who do not vote and are, in essence, very junior creditors and not owners of the GSEs.
Although there are reasons to worry over the GSEs, I have made a list of more important things about which to worry.
1) Any local or regional bank. Not only are they exposed to bad mortgages and loans to builders. Many are loaded up on GSE preferreds. This is not to say that the preferreds are not any good, but the price depreciation depletes the banks' balance sheet capital.
2) The entire high-yield bond market. Corporate defaults usually run about 5.00% during "normal" times. They can run over 10.00% during recessions. Currently, they are just over 1.00%. Look for that number to increase.
3) The Detroit Three. All three U.S. automakers are in DEEP trouble, far worse than the GSEs. Their current economic importance (or lack thereof) does not warrant a government bailout. Owning the Detroit three is adventuresome to say the least.
4) Speculating in energy. Is oil going up or is oil going down? The answer to both questions is, yes. The question is when. Don't speculate in commodities unless your convictions are strong.
5) Worry if all of your money is on he short end of the curve. The Fed will be on hold, possibly until this time next year or beyond. Do not count on rolling into higher yields.
6) Hedge Funds: Enough said.
7) Managed accounts, especially fixed income. You are paying 3.00% annually for what?
8) Worry about foolishly selling high-quality munis for fear of the bond insurers. Most munis which were insured never needed to be from an investor standpoint. However, it permitted municipalities to over dramatically lower yields. That's right, insured munis are beneficial to issuers and not investors. The same is true for call features.
9) Worry about getting to and from work safely. All else is moot if you are dead.
10) Finally and most importantly; Spend time with those you love. Rich or poor, employed or not, family is what life is really about. Money can be replaced. The love of one's family cannot.
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