I have been gone a week, but not much has changed since I have been away. Actually, not much has changed in the last few months. Yes, some stronger banks have repaid their TARP money, but the troubled banks remain so. In fact, one large bank apparently cannot launch its preferred to equity exchange. As the conversion price of the equity is $3.25, the current price of $3.03 could be a problem. Since the exchange was announced in late February, I have had many people ask my when the prices of this bank's preferreds will trade at parity by moving higher price wise. I stated that they will likely never trade at parity and that any convergence could come in the way of the equity price moving lower. This is exactly what has happened.
I have also warned that the high yield market may have risen too far, too fast. Barron's warns of this this weekend. I have also opined that although I think that, in the long-term, interest rates on the long end of the yield curve will move higher, the gain will likely be modest (and may be yet occur) because of factors such as the activities of our foreign trading partners. Very storng treasury auctions bear this out.
I have been critical of the PPIP (and the benefits of modifying mark to market). Most bank toxicity lies in the form of loans which are not marked to market any way. Because of this banks have not marked down their values much or at all. If they were to do so, some banks (those which have not repaid TARP) could be devastated. The PPIP would require banks to sell loan assets to private investors using cheap government leverage at prices below 100 cents on the dollar. Most banks won't and some cannot do this lest they risk another bank run.
Are their green shoots? Not really. Just as boom economies overshoot to the positive, bust economies overshoot to the negative. All we are experiencing is the economy settling. It could be settling into a new paradigm. One which requires borrowers to prove their creditworthiness. Now there is a novel idea. Now if Congress would only understand (or admit to) why lending will remain muted versus the housing boom and why that is a good thing in the long run.
Sunday, June 28, 2009
Tuesday, June 23, 2009
Just Dropped In
Checking in from vacation. The Wall Street Journal is reporting that the market sell-off is due to investors taking money off the table because the global economy is not yet expanding. No kidding! The Journal states that the previous market rally was due to investor optimism because economic data, although worsening, was worsening at a slower pace. I warned in this space that merely slowing the economic contraction is not sufficient to justify the so-called "green shoots" in the market. All that was growing were weeds.
Some argue that when economic data worsens at a slower pace, recovery is approaching. That may or may not be true. Slower contraction could merely mean that the economy is approaching replacement levels of activity. After all, consumers must consume at a level where they replace goods which have worn out or which have been, well consumed.
When recovery comes, what will it look like? I will probably look very mild, tame even. There will be much less uses of leverage in the immediate future. Credit will be given to the creditworthy. No more zero money down, low-interest financing of a $45,000 Tahoe for your favorite waitress. No more running to Best Buy for that 50 inch TV right before the Super Bowl. People will have to live within their means (for the first time in more than a generation). The problem is, our economy is not currently set up to function on such a reduced level of economic activity. Good luck GM and Chrysler, you are going to need it. That or more government (taxpayer) aid.
Some argue that when economic data worsens at a slower pace, recovery is approaching. That may or may not be true. Slower contraction could merely mean that the economy is approaching replacement levels of activity. After all, consumers must consume at a level where they replace goods which have worn out or which have been, well consumed.
When recovery comes, what will it look like? I will probably look very mild, tame even. There will be much less uses of leverage in the immediate future. Credit will be given to the creditworthy. No more zero money down, low-interest financing of a $45,000 Tahoe for your favorite waitress. No more running to Best Buy for that 50 inch TV right before the Super Bowl. People will have to live within their means (for the first time in more than a generation). The problem is, our economy is not currently set up to function on such a reduced level of economic activity. Good luck GM and Chrysler, you are going to need it. That or more government (taxpayer) aid.
Friday, June 19, 2009
V-A-C-A-T-I-O-N
I will be on vacation for the next week so I will give you some tidbits on which to chew.
1) The economy is not yet strong enough to generate broad inflation pressures or for the Fed to remove its gargantuan amount of stimulus.
2) Corporate bonds (and even preferreds) are NOT interest rate products. Many bonds, especially in the bank and finance (and to lesser extent in telecoms and utilities) are trading at fairly wide spreads to treasuries. In a recovery the credit spreads should narrow thereby offsetting at least some of the rising interest rates / treasury yields.
3) Why can some banks get their preferred for equity exchanges launched while others cannot. Be very concerned.
4) Prices at which a stock is trading may not be based on fundamental valuation when an arbitrage situation exists.
5) GM and Chrysler have about as much chance of making money under Mr. Obama's guidance (and with a UAW work force) as I do of becoming the Queen of England.
6) Dick Bove' has lost his grip on reality.
7) Junk bonds are up as overly-optimistic investors reach for yield. They have rallied even while defaults have increased. Stay away.
8) Be very worried about credit card and commercial mortgage defaults.
9) Fixed Income funds are not bond substitutes.
10) TIP indices do not rise just because inflation is positive. They rise when the year-over-year inflation rate rises. Beware of short-term TIPs trading at premiums with very high indices.
See you all in a week.
1) The economy is not yet strong enough to generate broad inflation pressures or for the Fed to remove its gargantuan amount of stimulus.
2) Corporate bonds (and even preferreds) are NOT interest rate products. Many bonds, especially in the bank and finance (and to lesser extent in telecoms and utilities) are trading at fairly wide spreads to treasuries. In a recovery the credit spreads should narrow thereby offsetting at least some of the rising interest rates / treasury yields.
3) Why can some banks get their preferred for equity exchanges launched while others cannot. Be very concerned.
4) Prices at which a stock is trading may not be based on fundamental valuation when an arbitrage situation exists.
5) GM and Chrysler have about as much chance of making money under Mr. Obama's guidance (and with a UAW work force) as I do of becoming the Queen of England.
6) Dick Bove' has lost his grip on reality.
7) Junk bonds are up as overly-optimistic investors reach for yield. They have rallied even while defaults have increased. Stay away.
8) Be very worried about credit card and commercial mortgage defaults.
9) Fixed Income funds are not bond substitutes.
10) TIP indices do not rise just because inflation is positive. They rise when the year-over-year inflation rate rises. Beware of short-term TIPs trading at premiums with very high indices.
See you all in a week.
Tuesday, June 16, 2009
Pulling Mussels From A Shell
The tug of war between the bond vigilantes on one side (trying to pull long-term treasury yields higher to keep government borrowing (and spending) in check) and the Fed and our "trading partners (which are trying to keep consumer borrowing costs low and the dollar strong) continues. During my discussions with lay people and financial advisers alike it appears as though many people are not aware of the influence exerted by foreign investors (corporations and foreign governments alike.
Many in my audience are not aware that our foreign trading partners have vested interests in keeping U.S. borrowing rates affordable and their home currencies weak relative to the U.S. dollar. Why would they want their currencies weak versus the dollar? It comes down to purchasing power. Nations such as China, Thailand, Japan, etc, have export-driven economies. If the U.S. dollar weakens versus their home currencies, their goods become more expensive for U.S. consumers. There is a fierce global battle for market share and our foreign trading partners will do whatever they can to succeed. Thus the appetite for U.S. treasuries is large.
How large is the appetite for U.S. treasuries among foreign governments and corporations? Their appetite can be described as ravenous. Our foreign trading partners are flush with dollars from selling their products in the U.S. They simply invest those dollars in U.S. securities, most often longer-dated U.S. treasuries. This serves to give them a low risk investment, fairly good return and the added benefits of keeping long-term borrowing costs low and lend strength to the U.S. dollar. Oil producing nations are similarly incentivized. Until (or unless) our trading partners can generate significantly more internal consumer demand, there will be continued support for the dollar and continued buying of U.S. treasuries, but that would involve granting individual freedoms that many of our trading partners are not prepared to do. Last week's healthy three-year, ten-year and thirty-year treasury auctions indicate that foreign investors are very much in the game.
What about alternative currencies and markets? Alternatives are problematic. China will not permit delivery of its debt or currency outside of its sphere of influence. The Japanese are net savers. More than a decade if basically free money at nearly 0.00% interest rates have not been able to spark Japanese consumer spending. What about the EU? What about it?
The EU is a loose and fractious institution. Consumer spending is not on par with U.S. consumers. Also, its financial system and banks are in worse condition than those of the U.S. Imagine that!! Look for long-term rates to rise gradually in a two step forward one step back fashion. Absolute interest rates will also be limited by the Fed. If inflation or higher rates due to inflation fears get out of control, look for the Fed to become less accommodative. The Fed's problem has been the reverse of stopping rates from rising too far in recent years. Remember back a few years when the Fed could not get long-term rates to rise in spite of aggressive tightening. Greenspan's conundrum was no such thing. Foreign investors were keeping long-term rates low and Mr. Greenspan knew this full well. However, he could not state such as it would have exposed the Fed as being somewhat impotent. Remember, the Fed controls the short end of the curve, but it is the bond market, the so-called vigilantes, who control the long end of the curve.
Many in my audience are not aware that our foreign trading partners have vested interests in keeping U.S. borrowing rates affordable and their home currencies weak relative to the U.S. dollar. Why would they want their currencies weak versus the dollar? It comes down to purchasing power. Nations such as China, Thailand, Japan, etc, have export-driven economies. If the U.S. dollar weakens versus their home currencies, their goods become more expensive for U.S. consumers. There is a fierce global battle for market share and our foreign trading partners will do whatever they can to succeed. Thus the appetite for U.S. treasuries is large.
How large is the appetite for U.S. treasuries among foreign governments and corporations? Their appetite can be described as ravenous. Our foreign trading partners are flush with dollars from selling their products in the U.S. They simply invest those dollars in U.S. securities, most often longer-dated U.S. treasuries. This serves to give them a low risk investment, fairly good return and the added benefits of keeping long-term borrowing costs low and lend strength to the U.S. dollar. Oil producing nations are similarly incentivized. Until (or unless) our trading partners can generate significantly more internal consumer demand, there will be continued support for the dollar and continued buying of U.S. treasuries, but that would involve granting individual freedoms that many of our trading partners are not prepared to do. Last week's healthy three-year, ten-year and thirty-year treasury auctions indicate that foreign investors are very much in the game.
What about alternative currencies and markets? Alternatives are problematic. China will not permit delivery of its debt or currency outside of its sphere of influence. The Japanese are net savers. More than a decade if basically free money at nearly 0.00% interest rates have not been able to spark Japanese consumer spending. What about the EU? What about it?
The EU is a loose and fractious institution. Consumer spending is not on par with U.S. consumers. Also, its financial system and banks are in worse condition than those of the U.S. Imagine that!! Look for long-term rates to rise gradually in a two step forward one step back fashion. Absolute interest rates will also be limited by the Fed. If inflation or higher rates due to inflation fears get out of control, look for the Fed to become less accommodative. The Fed's problem has been the reverse of stopping rates from rising too far in recent years. Remember back a few years when the Fed could not get long-term rates to rise in spite of aggressive tightening. Greenspan's conundrum was no such thing. Foreign investors were keeping long-term rates low and Mr. Greenspan knew this full well. However, he could not state such as it would have exposed the Fed as being somewhat impotent. Remember, the Fed controls the short end of the curve, but it is the bond market, the so-called vigilantes, who control the long end of the curve.
Thursday, June 11, 2009
Walk of Life
Just a quick update. First, long-dated U.S. treasuries rallied today after a stronger-than-expected 30-year government bond auction. There was strong interest from foreign central banks. Adding fuel to the rally was comments from Japan's finance minister Kaoru Yasano stating that he is confident about the outlook for U.S. bonds.
And so continues the tug-of-war between the Fed and foreign central banks (which wish to keep long-term borrowing rates manageable and, in the case of foreign central banks, to keep their currencies weak versus the dollar) and the bond vigilantes who are concerned and irate over the amount of debt and dollars the U.S. is printing. Who will win? The vigilantes, eventually, but the Fed and foreign investors will keep the rate rise modest. I think that if we see a 4.50% 10-year note in 2009 it will be the extent of the rise.
A word of advice for those involved in preferred exchanges into common. Assume that the equity price is fundamentally correct and that the preferred price has to adjust to parity with the common at your own peril. For one, trading at parity will not happen because that will mean no bid ask spread. Without the spread, no profit potential. Secondly, learn what a short squeeze is. Just as the preferreds have rallied due to the arbitrage, the common is at current levels due to a short squeeze. Watch them both drop after the exchange.
And so continues the tug-of-war between the Fed and foreign central banks (which wish to keep long-term borrowing rates manageable and, in the case of foreign central banks, to keep their currencies weak versus the dollar) and the bond vigilantes who are concerned and irate over the amount of debt and dollars the U.S. is printing. Who will win? The vigilantes, eventually, but the Fed and foreign investors will keep the rate rise modest. I think that if we see a 4.50% 10-year note in 2009 it will be the extent of the rise.
A word of advice for those involved in preferred exchanges into common. Assume that the equity price is fundamentally correct and that the preferred price has to adjust to parity with the common at your own peril. For one, trading at parity will not happen because that will mean no bid ask spread. Without the spread, no profit potential. Secondly, learn what a short squeeze is. Just as the preferreds have rallied due to the arbitrage, the common is at current levels due to a short squeeze. Watch them both drop after the exchange.
Tuesday, June 9, 2009
Amerika The Beautiful
It's official, the bulk of Chrysler's assets will go to FIAT. The UAW is safe..... for now. The Supreme Court decided that a group of Indiana pension funds did not have a strong enough legal argument to warrant a full review in front of the court. Although I wish it was different, the court was probably correct. After all, the vast majority of Chrysler's secured lenders had already agreed to the government sponsored bankruptcy and reorganization. What irks me and many others on both Wall Street and Main Street is how the agreement was reached with Chrysler's secured lenders.
On April 30th, 2009 President Obama and his "auto czar" Steven Rattner strong armed the majority of Chrysler's secured lenders, most of whom were TARP banks to agree to give up their VERY senior places on the capital structure to accept a 29 cents on the dollar recovery while the UAW (which has the most subordinate equity claim) is awarded 55% ownership of Chrysler. This feels like Soviet Union, but different. Chrysler will be run like a quasi-workers collective. Wait, it gets better.
Chrysler is being forced into the arms of FIAT for (ha, ha) modern small car technology. Isn't FIAT the company that was a bust for GM? Isn't FIAT the company that had to leave the U.S. market because it's quality was lower than that of the Detroit Three in the early 80s? Isn't FIAT the company known disparagingly in automotive circles as being an acronym for Fix It Again Tony? You bet it is. Chrysler WAS the domestic small car leader. Starting with the L platform Omnis (which pre-date the K-car), Chrysler matched the imports in mechanical reliability (but not in fit and finish) with domestically designed and built four cylinder engines (which were also among the most powerful small displacement engines on the market at the time). After struggling for a while, Chrysler rebounded with the cab-forward Dodge Intrepid / Chrysler Concorde and the Dodge Neon (the last domestic small car to turn a profit). What happened then was classic Detroit.
By the mid 90s Chrysler was considered the most efficient automaker in bringing designs from the drawing board to the production line (including imports). Former Marine Bob Lutz had Ma Mopar humming. Then fat Detroit came back. Executives paid themselves bonuses. The UAW wanted its share as well. The money for these payouts came from the R&D budget. By 1998 Chrysler was in trouble.
Chrysler engaged in a so-called merger of equals with Daimler (there is no such thing as a merger of equals). Although then Daimler chairman Juergen Schrempf did not understand Chrysler's market, he did understand Chrysler's cost structure and attempted to take the company upscale. Unfortunately, leather-clad $40,000 mini vans were not hot sellers. New chairman Dieter Zetsche understood both Chrysler's market and its cost structure. His lineup of V8-powered cars and trucks were a hit, until fuel prices rose due to a weak dollar. The die was cast. Chrysler was in trouble. Daimler couldn't wait to unload Chrysler and basically gave it away to private equity firm Cerberus, even guarantying all Chrysler bonds.
Now the government is propping up both Chrysler and GM as it struggles to maintain UAW and other union jobs. Perish the thought that GM and Chrysler build cars in non-union plants in the American South. Meanwhile Ford tries to go it without government help, but will likely need loans (to develop fuel-efficient vehicles) and needs its Ford Motor Credit unit to become an industrial bank to receive cheap government financing.
Speaking of cheap government financing, the government is permitting 10 banks to repay their TARP money. The 10 banks are: JP Morgan, Morgan Stanley, Goldman Sachs, American Express, U.S. Bancorp, Northern Trust, BB&T, State Street, Capital One and Bank of New York Mellon. Two large banks were conspicuously absent. One is so dysfunctional that I do not expect that we will see it repay TARP now or ever, at least not in its current form (see today's Wall Street Journal editorial entitled "Making Failure an Option".
Bank management knows that it must get as far away from the government to be successful. Investors should take the same approach. Stay far away from companies which have government equity ownership. Profit and investor value is not the government's goal.
On April 30th, 2009 President Obama and his "auto czar" Steven Rattner strong armed the majority of Chrysler's secured lenders, most of whom were TARP banks to agree to give up their VERY senior places on the capital structure to accept a 29 cents on the dollar recovery while the UAW (which has the most subordinate equity claim) is awarded 55% ownership of Chrysler. This feels like Soviet Union, but different. Chrysler will be run like a quasi-workers collective. Wait, it gets better.
Chrysler is being forced into the arms of FIAT for (ha, ha) modern small car technology. Isn't FIAT the company that was a bust for GM? Isn't FIAT the company that had to leave the U.S. market because it's quality was lower than that of the Detroit Three in the early 80s? Isn't FIAT the company known disparagingly in automotive circles as being an acronym for Fix It Again Tony? You bet it is. Chrysler WAS the domestic small car leader. Starting with the L platform Omnis (which pre-date the K-car), Chrysler matched the imports in mechanical reliability (but not in fit and finish) with domestically designed and built four cylinder engines (which were also among the most powerful small displacement engines on the market at the time). After struggling for a while, Chrysler rebounded with the cab-forward Dodge Intrepid / Chrysler Concorde and the Dodge Neon (the last domestic small car to turn a profit). What happened then was classic Detroit.
By the mid 90s Chrysler was considered the most efficient automaker in bringing designs from the drawing board to the production line (including imports). Former Marine Bob Lutz had Ma Mopar humming. Then fat Detroit came back. Executives paid themselves bonuses. The UAW wanted its share as well. The money for these payouts came from the R&D budget. By 1998 Chrysler was in trouble.
Chrysler engaged in a so-called merger of equals with Daimler (there is no such thing as a merger of equals). Although then Daimler chairman Juergen Schrempf did not understand Chrysler's market, he did understand Chrysler's cost structure and attempted to take the company upscale. Unfortunately, leather-clad $40,000 mini vans were not hot sellers. New chairman Dieter Zetsche understood both Chrysler's market and its cost structure. His lineup of V8-powered cars and trucks were a hit, until fuel prices rose due to a weak dollar. The die was cast. Chrysler was in trouble. Daimler couldn't wait to unload Chrysler and basically gave it away to private equity firm Cerberus, even guarantying all Chrysler bonds.
Now the government is propping up both Chrysler and GM as it struggles to maintain UAW and other union jobs. Perish the thought that GM and Chrysler build cars in non-union plants in the American South. Meanwhile Ford tries to go it without government help, but will likely need loans (to develop fuel-efficient vehicles) and needs its Ford Motor Credit unit to become an industrial bank to receive cheap government financing.
Speaking of cheap government financing, the government is permitting 10 banks to repay their TARP money. The 10 banks are: JP Morgan, Morgan Stanley, Goldman Sachs, American Express, U.S. Bancorp, Northern Trust, BB&T, State Street, Capital One and Bank of New York Mellon. Two large banks were conspicuously absent. One is so dysfunctional that I do not expect that we will see it repay TARP now or ever, at least not in its current form (see today's Wall Street Journal editorial entitled "Making Failure an Option".
Bank management knows that it must get as far away from the government to be successful. Investors should take the same approach. Stay far away from companies which have government equity ownership. Profit and investor value is not the government's goal.
Monday, June 8, 2009
Freeze Frame
I have been tied up with fun weekend stuff during the past few days. Let's recap the events since last Friday:
Employment: NFP indicated that the country lost "only" 345,000 jobs. Yes, it was better than the forecast loss of 530,000 jobs and a prior revised loss of 539,000 jobs, but a loss of more than 300,000 jobs is not good (some of the improvement was due to a change in the BLS birth /death model). I guess that it is good that the economy is "bottoming". However, I wonder if sailors on a crippled submarine feel that way when they come to rest on the ocean floor. I guess it is better than reaching crush depth, which was possible at one point. Let's hope than the economy does not slip off the ledge into the abyss.
Capital Markets and Rates: The cheerleaders have been thumping their chests about the resilience of the stock markets and the inflation the treasury market appears to be predicting. Ask yourself this question: What would happen if the Fed would remove the ample interbank liquidity programs (TAF, TSLF, etc.) instituted in the wake of the Bear Stearns debacle? The capital markets (and more than a few banks) would collapse. Let's not kid ourselves, the market rebound is almost entirely due to the Fed. That is by design, but cannot last forever.
Long rates are rising because of inflation, but not inflation due to growth. The market is pricing in currency devaluation from the printing of money and issuance of large amounts of government debt. This is also why oil prices are rising.
Autos: The sham that is the auto bailout continues. Supreme Court Justice Ruth Bader Ginsburg has granted a group of Indiana pension funds which are senior secured lenders to Chrysler LLC a stay to hold off the consummation of a deal which would create a merger between Chrysler and FIAT and leave the UAW (whose claim on Chrysler assets is as low as Hell's sub-basement) as the majority owner of Chrysler. Let's hope that justice prevails. The Obama administration and the UAW are fearful it will. This could have implications for the GM bankruptcy as well, should the Supreme Court adhere to the rule of law.
Speaking of GM, GM bondholders will conduct an auction with their CDS counterparties as soon as June 12 to determine workout prices for CDS contracts. This could be delayed pending the court action with Chrysler as that could set a precedent which could be used by GM creditors. Only 54% of GM bondholders agreed to the bankruptcy recovery amounts offered by GM and the government. The Supreme Court could elect to hear arguments from GM creditors. If the rule of law prevails, the UAW could (should) be pushed behind the bondholders in the line for GM bankruptcy recovery.
Employment: NFP indicated that the country lost "only" 345,000 jobs. Yes, it was better than the forecast loss of 530,000 jobs and a prior revised loss of 539,000 jobs, but a loss of more than 300,000 jobs is not good (some of the improvement was due to a change in the BLS birth /death model). I guess that it is good that the economy is "bottoming". However, I wonder if sailors on a crippled submarine feel that way when they come to rest on the ocean floor. I guess it is better than reaching crush depth, which was possible at one point. Let's hope than the economy does not slip off the ledge into the abyss.
Capital Markets and Rates: The cheerleaders have been thumping their chests about the resilience of the stock markets and the inflation the treasury market appears to be predicting. Ask yourself this question: What would happen if the Fed would remove the ample interbank liquidity programs (TAF, TSLF, etc.) instituted in the wake of the Bear Stearns debacle? The capital markets (and more than a few banks) would collapse. Let's not kid ourselves, the market rebound is almost entirely due to the Fed. That is by design, but cannot last forever.
Long rates are rising because of inflation, but not inflation due to growth. The market is pricing in currency devaluation from the printing of money and issuance of large amounts of government debt. This is also why oil prices are rising.
Autos: The sham that is the auto bailout continues. Supreme Court Justice Ruth Bader Ginsburg has granted a group of Indiana pension funds which are senior secured lenders to Chrysler LLC a stay to hold off the consummation of a deal which would create a merger between Chrysler and FIAT and leave the UAW (whose claim on Chrysler assets is as low as Hell's sub-basement) as the majority owner of Chrysler. Let's hope that justice prevails. The Obama administration and the UAW are fearful it will. This could have implications for the GM bankruptcy as well, should the Supreme Court adhere to the rule of law.
Speaking of GM, GM bondholders will conduct an auction with their CDS counterparties as soon as June 12 to determine workout prices for CDS contracts. This could be delayed pending the court action with Chrysler as that could set a precedent which could be used by GM creditors. Only 54% of GM bondholders agreed to the bankruptcy recovery amounts offered by GM and the government. The Supreme Court could elect to hear arguments from GM creditors. If the rule of law prevails, the UAW could (should) be pushed behind the bondholders in the line for GM bankruptcy recovery.
Tuesday, June 2, 2009
We Can Work It Out
Today's Pending Home sales report was an example of capitalism at work. Today's data indicated that depressed home prices helped to bring buyers in off the sidelines. Imagine that. When home prices are permitted to adjust (fall) to levels at which home buying becomes an attractive proposition, those who can get approved for mortgages enter or re-enter the market.
This is something I have written about several times before. However, I stated that if home prices would have been permitted to adjust (fall) to levels which prospective buyers would be incentivized to re-enter the housing market AND if this was permitted to occur unabated the pool of potential buyers would probably have been larger. This is because lending would not have frozen the way it had following misguided attempts to avoid the inevitable correction. Housing price corrections due to delinquencies, defaults and the reigning in of easy lending policies is an efficient way of shifting real estate from those who cannot afford certain properties and to those who can. They also reset prices to levels more indicative of fundamental supply and demand rather than inflated prices due to irresponsible and "creative" lending.
Americans are funny people, they want affordable housing and yet they want their home values to rise. They want social security to be there and to provide meaningful retirement benefits yet they are resistant to any real reform. Now from the auto industry comes the news that The Detroit Three experienced year-over-year sales increases while Toyota and Honda experienced sales declines of over 40% each on a year-over-year basis. So much for Americans being sick of gas guzzlers. Americans (by and large) will purchase the most powerful, the most comfortable and the most enjoyable vehicles which gasoline prices allow. Obama Motors executives should take heed. Car buyers should also pay attention to fuel prices as speculation of a weaker dollar due to increased debt and the monetization of that debt (and some speculators with overly rosy economic views) have oil prices on the rise.
About treasury yields. Long-term yields have been rising and will probably continue to rise for a while, but bond bears should manage their expectations. There are forces (foreign buyers, lack if core inflation pressures and eventual Fed policy) which will keep long-term rates from spiraling out of control. However, the Fed is not close to taking away its short-term stimulus (low Fed Funds and Discount rates along with a myriad of programs to spur interbank lending). The economic recovery is on life support and removing the stimulus would be like pulling the plug.
I have had many questions regarding the details of the BAC preferred exchange. I detailed the exchange a few days ago on this blog. I have been informed that Morgan Stanley's preferred desk published an internal report detailing the exchange and even includes desk market opinion. It is nice to know that some firms still know how to conduct themselves well.
This is something I have written about several times before. However, I stated that if home prices would have been permitted to adjust (fall) to levels which prospective buyers would be incentivized to re-enter the housing market AND if this was permitted to occur unabated the pool of potential buyers would probably have been larger. This is because lending would not have frozen the way it had following misguided attempts to avoid the inevitable correction. Housing price corrections due to delinquencies, defaults and the reigning in of easy lending policies is an efficient way of shifting real estate from those who cannot afford certain properties and to those who can. They also reset prices to levels more indicative of fundamental supply and demand rather than inflated prices due to irresponsible and "creative" lending.
Americans are funny people, they want affordable housing and yet they want their home values to rise. They want social security to be there and to provide meaningful retirement benefits yet they are resistant to any real reform. Now from the auto industry comes the news that The Detroit Three experienced year-over-year sales increases while Toyota and Honda experienced sales declines of over 40% each on a year-over-year basis. So much for Americans being sick of gas guzzlers. Americans (by and large) will purchase the most powerful, the most comfortable and the most enjoyable vehicles which gasoline prices allow. Obama Motors executives should take heed. Car buyers should also pay attention to fuel prices as speculation of a weaker dollar due to increased debt and the monetization of that debt (and some speculators with overly rosy economic views) have oil prices on the rise.
About treasury yields. Long-term yields have been rising and will probably continue to rise for a while, but bond bears should manage their expectations. There are forces (foreign buyers, lack if core inflation pressures and eventual Fed policy) which will keep long-term rates from spiraling out of control. However, the Fed is not close to taking away its short-term stimulus (low Fed Funds and Discount rates along with a myriad of programs to spur interbank lending). The economic recovery is on life support and removing the stimulus would be like pulling the plug.
I have had many questions regarding the details of the BAC preferred exchange. I detailed the exchange a few days ago on this blog. I have been informed that Morgan Stanley's preferred desk published an internal report detailing the exchange and even includes desk market opinion. It is nice to know that some firms still know how to conduct themselves well.
Monday, June 1, 2009
I Can't Tell You Why
I don't know what it is about the GM bankruptcy that investors and financial advisers don't understand. GM has filed for bankruptcy protection from its creditors. This means that GM will never make another interest payment on its current outstanding bonds. That is what bankruptcy protection means. Investors will receive an as yest undetermined sum of compensation. That compensation will most likely come in the form of new GM commons stock. What happens with current outstanding GM stock? For most investors it will be worthless. However, those who have physical certificates may fine a number of uses. Such uses include bird cage lining, fireplace fire starters or as toilet tissue.
The results of the bondholder vote was closer than what the government probably wanted to see. Only 54% of outstanding bondholders voted to approve a bankruptcy recovery of a 10% equity stake in a restructured GM plus warrants which could be exercised in seven to ten years which could give bondholders an additional 15% equity ownership of GM. Since GM is likely to be forced to build small cars or hybrids, which have low profit margins, in UAW plants (which are still more expensive than non-UAW plants in the American South or overseas), it is unlikely that GM will be flush with surplus cash any time soon.
Auto Task Force Chief Stephen Rattner stated the following regarding how GM would be run:
"No plant decisions, no job decisions, no dealer decisions, no color of car decisions," he added. "Those are all going to be left to management."
He makes no mention of what kind of cars GM would build. That is because car designs will be mandated by the government rather than the market. Some in Congress may want more control over GM than Mr. Rattner is intimating. House Speaker Nancy Pelosi and Majority Leader Steny Hoyer asked President Obama to prevent shipping car production off shore. This has British Leyland written all over it. I am still waiting for the new version of the Triumph Spitfire.
Readers of my blog will remember that I explained early on that bondholders wanted a GM bankruptcy (if they couldn't gain control of the company) as they had much to gain by way of CDS protection. I also wrote about how current bondholders were permitted to vote on bankruptcy compensation, but due their exchanging bonds to counter parties upon settling CDS contracts, many current bondholders are not the creditors who will receive compensation when bankruptcy is settled. For this reason, combined with the fact that the bondholder vote was not a clear mandate could result in a bankruptcy judge deciding to hear arguments from creditors in spite of the bondholder vote. Alas, that probably will not happen as the Obama administration will probably strong arm the courts.
Prices of long-dated U.S. treasuries fell sharply on "optimistic" economic data. If today's data had been released in 2008 or 2007 it would have been viewed as decidedly negative. However, compared to what data had been, it is an improvement. Although the recession may be winding down, a sharp recovery is unlikely.
How will housing rebound when borrowers must do more than fog a mirror to get a mortgage? Where are new jobs coming from? Weak dollar speculators are pushing oil prices higher (those speculating that oil should go higher on strong growth are foolish, but could benefit thanks to a dollar which should weaken. God protects fools and drunks).
The real question is will bond vigilantes (referenced previously in this blog) be victorious in pushing long-term rates higher as they vote no confidence on Mr. Obama's economic polices or will the Fed and Asian trading partners be successful in keeping long-term borrowing costs low? I am not one to bet against the Fed, but in the words of former Clinton adviser James Carville when referring to the bond vigilantes of the 1990s:
"I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody. "
Mr. Obama should take heed.
The results of the bondholder vote was closer than what the government probably wanted to see. Only 54% of outstanding bondholders voted to approve a bankruptcy recovery of a 10% equity stake in a restructured GM plus warrants which could be exercised in seven to ten years which could give bondholders an additional 15% equity ownership of GM. Since GM is likely to be forced to build small cars or hybrids, which have low profit margins, in UAW plants (which are still more expensive than non-UAW plants in the American South or overseas), it is unlikely that GM will be flush with surplus cash any time soon.
Auto Task Force Chief Stephen Rattner stated the following regarding how GM would be run:
"No plant decisions, no job decisions, no dealer decisions, no color of car decisions," he added. "Those are all going to be left to management."
He makes no mention of what kind of cars GM would build. That is because car designs will be mandated by the government rather than the market. Some in Congress may want more control over GM than Mr. Rattner is intimating. House Speaker Nancy Pelosi and Majority Leader Steny Hoyer asked President Obama to prevent shipping car production off shore. This has British Leyland written all over it. I am still waiting for the new version of the Triumph Spitfire.
Readers of my blog will remember that I explained early on that bondholders wanted a GM bankruptcy (if they couldn't gain control of the company) as they had much to gain by way of CDS protection. I also wrote about how current bondholders were permitted to vote on bankruptcy compensation, but due their exchanging bonds to counter parties upon settling CDS contracts, many current bondholders are not the creditors who will receive compensation when bankruptcy is settled. For this reason, combined with the fact that the bondholder vote was not a clear mandate could result in a bankruptcy judge deciding to hear arguments from creditors in spite of the bondholder vote. Alas, that probably will not happen as the Obama administration will probably strong arm the courts.
Prices of long-dated U.S. treasuries fell sharply on "optimistic" economic data. If today's data had been released in 2008 or 2007 it would have been viewed as decidedly negative. However, compared to what data had been, it is an improvement. Although the recession may be winding down, a sharp recovery is unlikely.
How will housing rebound when borrowers must do more than fog a mirror to get a mortgage? Where are new jobs coming from? Weak dollar speculators are pushing oil prices higher (those speculating that oil should go higher on strong growth are foolish, but could benefit thanks to a dollar which should weaken. God protects fools and drunks).
The real question is will bond vigilantes (referenced previously in this blog) be victorious in pushing long-term rates higher as they vote no confidence on Mr. Obama's economic polices or will the Fed and Asian trading partners be successful in keeping long-term borrowing costs low? I am not one to bet against the Fed, but in the words of former Clinton adviser James Carville when referring to the bond vigilantes of the 1990s:
"I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody. "
Mr. Obama should take heed.
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