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collegio dei patafisici
Contagio o non contagio?
China’s Fannie and Freddie problemInteresting figures in the New York Times on Monday highlight why the escalating problems at troubled US mortgage giants Fannie Mae and Freddie Mac are far from being just a US problem. Among foreign investors at least, the Chinese and Japanese clearly have the greatest cause for concern, but there are many more affected by the recent turmoi, from sovereign wealth funds to small quasi-government agenciesl.
In a neat breakdown of the figures, the NYT reports that about one-fifth of securities issued by Fannie, Freddie and a handful of much smaller quasi-governmental agencies - some $1,500 bn worth - were held by foreign investors at the end of March. In effect, “one out of 10 American mortgages is… in the hands of institutions and governments outside the US”, the paper adds.
Now that the two companies are at risk, how their rescue is handled will ultimately test the world’s faith in American markets. It could also influence the level of interest rates and weigh on the strength of the dollar for years to come, analysts say.
Asian institutions and investors hold some $800bn in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376bn and Japan $228bn as of June 2007, the most recent country-specific Treasury figures.
In Europe, roughly $39bn in Fannie and Freddie debt is held in Luxembourg and $33bn more in Belgium, countries that are home to large investment management firms. UK investors hold $28bn billion, and Russian buyers hold $75bn. Middle Eastern SWFs are also believed to be big investors in Fannie and Freddie debt.
The trillions in securities issued by Fannie and Freddie and backed by US mortgages were never explicitly guaranteed by the US government, but foreign and domestic investors alike “have always believed, because of the companies’ integral role in the housing market and their marketing pitch, that the guarantee would be backed up if it were tested”, notes the NYT.
Indeed.
China’s Fannie and Freddie problemInteresting figures in the New York Times on Monday highlight why the escalating problems at troubled US mortgage giants Fannie Mae and Freddie Mac are far from being just a US problem. Among foreign investors at least, the Chinese and Japanese clearly have the greatest cause for concern, but there are many more affected by the recent turmoi, from sovereign wealth funds to small quasi-government agenciesl.
In a neat breakdown of the figures, the NYT reports that about one-fifth of securities issued by Fannie, Freddie and a handful of much smaller quasi-governmental agencies - some $1,500 bn worth - were held by foreign investors at the end of March. In effect, “one out of 10 American mortgages is… in the hands of institutions and governments outside the US”, the paper adds.
Now that the two companies are at risk, how their rescue is handled will ultimately test the world’s faith in American markets. It could also influence the level of interest rates and weigh on the strength of the dollar for years to come, analysts say.
Asian institutions and investors hold some $800bn in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376bn and Japan $228bn as of June 2007, the most recent country-specific Treasury figures.
In Europe, roughly $39bn in Fannie and Freddie debt is held in Luxembourg and $33bn more in Belgium, countries that are home to large investment management firms. UK investors hold $28bn billion, and Russian buyers hold $75bn. Middle Eastern SWFs are also believed to be big investors in Fannie and Freddie debt.
The trillions in securities issued by Fannie and Freddie and backed by US mortgages were never explicitly guaranteed by the US government, but foreign and domestic investors alike “have always believed, because of the companies’ integral role in the housing market and their marketing pitch, that the guarantee would be backed up if it were tested”, notes the NYT.
Indeed.
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collegio dei patafisici
Credit risk diverges across eurozone
By David Oakley in London
Published: July 21 2008 03:00 | Last updated: July 21 2008 03:00
Investor fears for the credit risk of eurozone countries with weaker economies has increased sharply this month.
Prices of credit default swaps - a kind of insurance against bond defaults and the best gauge of risk in the debt markets - for Greece, Italy, Spain, Portugal and Ireland have all jumped.
In contrast, German and French CDS prices have been relatively steady on views that the eurozone's two biggest economies will hold up better in a tougher climate. CDS prices for the UK, which is outside the eurozone, have been steady in spite of fears for the country's housing market.
Greek, Italian, Spanish, Portuguese and Irish 10-year bond yields have also widened sharply against Germany in the past month.
Thomas Mayer, chief European economist at Deutsche Bank, said: "For a long time the economic environment was benign, but the party has now come to an end for the eurozone and particularly the peripheral economies, such as Italy and Greece."
Bankers say tensions could rise over the direction of monetary policy because it is difficult to set one interest rate for 15 countries with economies that are diverging in terms of growth, public finances and credit worthiness.
For example, consensus forecasts estimate Italian growth this year will be 0.4 per cent compared with a growth rate in Germany of 2.2 per cent. Spain and Ireland are also more exposed to the threat of recession because of the collapse in property prices, while Greece and Portugal have large current account deficits.
Meyrick Chapman, a fixed income strategist at UBS, said: "The probability of recession is not equal across the eurozone. Germany is in much better shape than countries, such as Italy, Spain, Ireland and Greece, and can probably better weather the problems. German CDS prices are likely to continue to perform better than other eurozone -countries."
CDS prices have risen since June 5, when Jean-Claude Trichet, European Central Bank president, stepped up warnings on inflation. Since then, the cost to insure German debt against default has risen by €1,000 to €6,000 for €10m of debt. In contrast, the cost to insure Greek debt has risen €16,000 to €51,000. It has risen €15,000 for Italy, €14,000 for Portugal, €13,000 for Spain and €10,000 for Ireland.
Wolfgang Münchau, Page 9
By David Oakley in London
Published: July 21 2008 03:00 | Last updated: July 21 2008 03:00
Investor fears for the credit risk of eurozone countries with weaker economies has increased sharply this month.
Prices of credit default swaps - a kind of insurance against bond defaults and the best gauge of risk in the debt markets - for Greece, Italy, Spain, Portugal and Ireland have all jumped.
In contrast, German and French CDS prices have been relatively steady on views that the eurozone's two biggest economies will hold up better in a tougher climate. CDS prices for the UK, which is outside the eurozone, have been steady in spite of fears for the country's housing market.
Greek, Italian, Spanish, Portuguese and Irish 10-year bond yields have also widened sharply against Germany in the past month.
Thomas Mayer, chief European economist at Deutsche Bank, said: "For a long time the economic environment was benign, but the party has now come to an end for the eurozone and particularly the peripheral economies, such as Italy and Greece."
Bankers say tensions could rise over the direction of monetary policy because it is difficult to set one interest rate for 15 countries with economies that are diverging in terms of growth, public finances and credit worthiness.
For example, consensus forecasts estimate Italian growth this year will be 0.4 per cent compared with a growth rate in Germany of 2.2 per cent. Spain and Ireland are also more exposed to the threat of recession because of the collapse in property prices, while Greece and Portugal have large current account deficits.
Meyrick Chapman, a fixed income strategist at UBS, said: "The probability of recession is not equal across the eurozone. Germany is in much better shape than countries, such as Italy, Spain, Ireland and Greece, and can probably better weather the problems. German CDS prices are likely to continue to perform better than other eurozone -countries."
CDS prices have risen since June 5, when Jean-Claude Trichet, European Central Bank president, stepped up warnings on inflation. Since then, the cost to insure German debt against default has risen by €1,000 to €6,000 for €10m of debt. In contrast, the cost to insure Greek debt has risen €16,000 to €51,000. It has risen €15,000 for Italy, €14,000 for Portugal, €13,000 for Spain and €10,000 for Ireland.
Wolfgang Münchau, Page 9
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collegio dei patafisici
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collegio dei patafisici
UP AND DOWN WALL STREET
Monday, July 21, 2008
Dead Stocks Rallying
By ALAN ABELSON
The financials come to life in a "could have been worse" market. Respite, not
recovery.
IT'S WEARISOME, TO SAY THE LEAST, TO CHRONICLE the bad news on the financial front, week after week
after bloody week. And we long for the chance to switch from dirge to lullaby as we compose our weekly litany of
what's happening and what's likely to happen, in both the stock market and the economy.
Being the messenger who delivers the bad news is just part of the job, the dark and dirty part, you might say. But
after all these years, it still hurts to see grown men cry (women, being the stronger sex, tend to make do with a
grimace).
So when, as they finally did last week, the clouds that have enshrouded the investment landscape for months
suddenly seem to be lifting, we'd normally seize the opportunity to start chirping instead of carping. But no sooner
had we begun to sound the first joyous note than we found ourselves confronted by a devil of a dilemma. To wit:
Is the recovery for real? Or is it merely the result of one of those fabricated rumors that the SEC sternly has warned
will be prosecuted to the full extent of the law? And, if it should prove the latter, do we risk jail time for
perpetuating a false rumor by giving it currency in this sacred space?
What a conundrum! We were somewhat reassured after inferring from a scan of the dictum that only false rumors
that cause stocks to go down -- not false rumors that cause stocks to go up -- are verboten by the powers that be.
Which makes sense, we guess, since everybody loves a winner.
Still, what gives us pause and, more than that, makes us fidgety, is that several short sellers phoned us to report
the upswing in the market (and we plumb forgot to ask whether any of them were guilty of naked short selling,
although in their case the literal image that phrase conjures up is itself more than a little unsettling).
Rather weird, too, it strikes us, is that naked short selling -- that is, selling shares short before you've arranged to
borrow them, as the SEC has mandated on the stocks of 19 key lenders including such impoverished beauties as
Fannie Mae and Freddie Mac -- is already illegal. An incorrigible cynic might be prompted to conjecture that
Chairman Cox and his team of ferocious Chihuahuas are engaged in making a very public hullabaloo to cover up
their shameful laxity in enforcing the securities laws.
In like vein, that same unreconstructed cynic might wonder if the agency, by promiscuously issuing subpoenas to
virtually everyone on Wall Street who ever uttered the name Bear Stearns is not so much intent on pursuing a
forensic autopsy as helping the staggering economy by throwing money around like an investment banker after his
first bottle of wine, and enriching legions of lawyers.
Our timidity, not to mention our confusion, has been greatly furthered by the fingering by Washington of speculators
for hiking the price of oil sky-high. Are the short sellers who drive stocks down the same knaves who drive oil prices
up? Are they ambidextrous investors or two distinct species? Wouldn't it prevent innocents like ourselves from being
ensnared by these bad people if they were compelled to have identifying tattoos imprinted on their foreheads that
marked them as naked short sellers, speculators or, heaven forbid, both?
But, forgive us this confessional digression. We're a journalist first and foremost. And journalists are fearless (within
reason) and dedicated to speaking truth to power (especially when it doesn't cost them anything). So here goes:
The stock market is rallying and the spirited rally has legs that could carry it onward and upward for at least another
day. Toot the horns and bang the drum and shout hallelujah!
THOSE MIGHTY BURSTS OF AGITATION and hot air in Washington, even if most of what passed for action was
really motion, did provide the excuse the market needed to show a little spunk. All the sound and fury about short
sellers, besides confounding the trading desks of most Street houses, inevitably spooked the bearishly inclined, who
rushed to cover their short positions, particularly in the financial sector, where pickings had been lush and easy, and
seek the safety of the sidelines.
And it certainly didn't hurt that crude, which had touched $147 a barrel a couple of weeks ago, a cool 90% higher
than a year earlier and up some 40% since the start of this year, took a spill. Before attracting support, it broke
below $130. Here, too, we suspect, Congress' huffing and puffing about commodity-index speculation sent a bit of a
shiver through futures traders.
Indeed, a reverse similarity was at play in the stock market's rally and petro's skid. Both were "entitled" to at least a
brief change of course. Crude, as noted, has been on a tear, and not only this past year: It's up roughly six-fold
since 2001 and has comfortably more than doubled since the final quarter of 2006. A 10% or 11% decline, although
inarguably compressed, would seem to merit that much-abused description of "correction," and not an especially
severe one, at that.
For its part, our good old stock market, before it found some footing, was off 22.6% (the Dow), 22.5% (Nasdaq)
and 22.4% (the S&P 500), from the peaks reached in October of '07. This year's performance hasn't been anything
to write home about, either, with the Dow industrials down 13% and the S&P 500 and Nasdaq off about 14%. As to
the financials -- we trust you're sitting down -- the poor things have been positively pulverized, losing upward of
54% between their high in February 2007 and their low last week.
Even in the grisliest bear markets, sellers suffer an occasional spot of fatigue, draw a breath and take a time out.
We strongly suspect that's pretty much the story here for equities. As to oil, mindful of the potential erosion of
demand that recession and obscene prices are likely to cause, we nonetheless have every confidence that Ben, with
his helicopter, and Hank, with his bazooka, will continue to wreak havoc on the badly wounded dollar, one of the
unintended consequences of which will be to bolster crude prices.
And not the least of the reasons we remain skeptical of the prospects for stocks is that it's a "it coulda been worse"
market. Especially among the walking dead of the financials, the release of operating results awash in red ink were
greeted by the cry "it coulda been worse," and their stocks momentarily came to life.
This tendency was also very much in evidence among banks and their kin that have weathered the credit storms
and mortgage mess in comparatively decent shape -- like JPMorgan Chase (ticker: JPM), which reported a 50% drop
in profits and whose shares promptly enjoyed a sharp gain.
The bank's top man, James Dimon, in releasing its lower earnings report, termed the economy weak and likely to
get weaker and ventured that capital markets will remain under stress. He also warned that losses on prime
mortgages (the cream of the crop that is turning sour, big-time) could triple. Mr. Dimon, rather a class act in a field
not abounding in them, gets high marks for his candor. As for the eager beavers who shrugged off his cautions and
rushed to buy the stock, we give them an investment grade of "F," for frivolous.
And for all those hopeful souls who have been champing at the bit to buy because things could have been worse, we
say stick around awhile; they will be.
WHY WE'RE STILL BEARISH WAS SPELLED out starkly in a dispatch we received last week from Nouriel Roubini.
Nouriel is a professor of economics at NYU Stern School of Business (but don't hold that against him) and runs an
economic advisory firm called RGE Monitor that casts a knowing and clear eye on the global financial and economic
scene. We think he's top-notch (which means we agree with him, a lot of the time).
The nub of his argument is that we're suffering the worst financial crisis since the Great Depression, and he
proceeds to give chilling chapter and verse. He predicts that hundreds of small banks loaded with real estate will go
bust and dozens of large regional and national banks will also find themselves in deep do-do.
He reckons that, in a few years, there'll be no major independent broker-dealers left: They'll either pack it in or
merge, victims of excessive leverage and a badly flawed and discredited business model.
The Federal Deposit Insurance Corp., after it gets through picking up the pieces of IndyMac, will sooner or later have
to get a capital transfusion, Nouriel asserts, because its insurance premiums won't cover the tab of rescuing all the
troubled banks. He foresees credit losses ultimately reaching at least $1 trillion and anticipates a heap of woe for
credit purveyors across the board.
The poor consumer, he contends, is shopped out and being hammered by falling home prices, falling equity prices,
falling jobs and incomes, rising inflation. The recession he anticipates will last 12 to 18 months. And the rest of the
world won't escape: He looks for hard landings for 12 major economies. As for the stock market, he hazards that
there's plenty of room left on the downside. In fact, he feels the bear market won't end until equities are down a full
40% from their peaks.
We must say this vision is a mite too apocalyptic even for us. But Nouriel is not a professional fear-monger out to
make a splash with end-of-the-world prognostications He's a sound guy with a solid record and an impressive
résumé. We obviously believe his views are worth pondering, even if they ruin your appetite.
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
Monday, July 21, 2008
Dead Stocks Rallying
By ALAN ABELSON
The financials come to life in a "could have been worse" market. Respite, not
recovery.
IT'S WEARISOME, TO SAY THE LEAST, TO CHRONICLE the bad news on the financial front, week after week
after bloody week. And we long for the chance to switch from dirge to lullaby as we compose our weekly litany of
what's happening and what's likely to happen, in both the stock market and the economy.
Being the messenger who delivers the bad news is just part of the job, the dark and dirty part, you might say. But
after all these years, it still hurts to see grown men cry (women, being the stronger sex, tend to make do with a
grimace).
So when, as they finally did last week, the clouds that have enshrouded the investment landscape for months
suddenly seem to be lifting, we'd normally seize the opportunity to start chirping instead of carping. But no sooner
had we begun to sound the first joyous note than we found ourselves confronted by a devil of a dilemma. To wit:
Is the recovery for real? Or is it merely the result of one of those fabricated rumors that the SEC sternly has warned
will be prosecuted to the full extent of the law? And, if it should prove the latter, do we risk jail time for
perpetuating a false rumor by giving it currency in this sacred space?
What a conundrum! We were somewhat reassured after inferring from a scan of the dictum that only false rumors
that cause stocks to go down -- not false rumors that cause stocks to go up -- are verboten by the powers that be.
Which makes sense, we guess, since everybody loves a winner.
Still, what gives us pause and, more than that, makes us fidgety, is that several short sellers phoned us to report
the upswing in the market (and we plumb forgot to ask whether any of them were guilty of naked short selling,
although in their case the literal image that phrase conjures up is itself more than a little unsettling).
Rather weird, too, it strikes us, is that naked short selling -- that is, selling shares short before you've arranged to
borrow them, as the SEC has mandated on the stocks of 19 key lenders including such impoverished beauties as
Fannie Mae and Freddie Mac -- is already illegal. An incorrigible cynic might be prompted to conjecture that
Chairman Cox and his team of ferocious Chihuahuas are engaged in making a very public hullabaloo to cover up
their shameful laxity in enforcing the securities laws.
In like vein, that same unreconstructed cynic might wonder if the agency, by promiscuously issuing subpoenas to
virtually everyone on Wall Street who ever uttered the name Bear Stearns is not so much intent on pursuing a
forensic autopsy as helping the staggering economy by throwing money around like an investment banker after his
first bottle of wine, and enriching legions of lawyers.
Our timidity, not to mention our confusion, has been greatly furthered by the fingering by Washington of speculators
for hiking the price of oil sky-high. Are the short sellers who drive stocks down the same knaves who drive oil prices
up? Are they ambidextrous investors or two distinct species? Wouldn't it prevent innocents like ourselves from being
ensnared by these bad people if they were compelled to have identifying tattoos imprinted on their foreheads that
marked them as naked short sellers, speculators or, heaven forbid, both?
But, forgive us this confessional digression. We're a journalist first and foremost. And journalists are fearless (within
reason) and dedicated to speaking truth to power (especially when it doesn't cost them anything). So here goes:
The stock market is rallying and the spirited rally has legs that could carry it onward and upward for at least another
day. Toot the horns and bang the drum and shout hallelujah!
THOSE MIGHTY BURSTS OF AGITATION and hot air in Washington, even if most of what passed for action was
really motion, did provide the excuse the market needed to show a little spunk. All the sound and fury about short
sellers, besides confounding the trading desks of most Street houses, inevitably spooked the bearishly inclined, who
rushed to cover their short positions, particularly in the financial sector, where pickings had been lush and easy, and
seek the safety of the sidelines.
And it certainly didn't hurt that crude, which had touched $147 a barrel a couple of weeks ago, a cool 90% higher
than a year earlier and up some 40% since the start of this year, took a spill. Before attracting support, it broke
below $130. Here, too, we suspect, Congress' huffing and puffing about commodity-index speculation sent a bit of a
shiver through futures traders.
Indeed, a reverse similarity was at play in the stock market's rally and petro's skid. Both were "entitled" to at least a
brief change of course. Crude, as noted, has been on a tear, and not only this past year: It's up roughly six-fold
since 2001 and has comfortably more than doubled since the final quarter of 2006. A 10% or 11% decline, although
inarguably compressed, would seem to merit that much-abused description of "correction," and not an especially
severe one, at that.
For its part, our good old stock market, before it found some footing, was off 22.6% (the Dow), 22.5% (Nasdaq)
and 22.4% (the S&P 500), from the peaks reached in October of '07. This year's performance hasn't been anything
to write home about, either, with the Dow industrials down 13% and the S&P 500 and Nasdaq off about 14%. As to
the financials -- we trust you're sitting down -- the poor things have been positively pulverized, losing upward of
54% between their high in February 2007 and their low last week.
Even in the grisliest bear markets, sellers suffer an occasional spot of fatigue, draw a breath and take a time out.
We strongly suspect that's pretty much the story here for equities. As to oil, mindful of the potential erosion of
demand that recession and obscene prices are likely to cause, we nonetheless have every confidence that Ben, with
his helicopter, and Hank, with his bazooka, will continue to wreak havoc on the badly wounded dollar, one of the
unintended consequences of which will be to bolster crude prices.
And not the least of the reasons we remain skeptical of the prospects for stocks is that it's a "it coulda been worse"
market. Especially among the walking dead of the financials, the release of operating results awash in red ink were
greeted by the cry "it coulda been worse," and their stocks momentarily came to life.
This tendency was also very much in evidence among banks and their kin that have weathered the credit storms
and mortgage mess in comparatively decent shape -- like JPMorgan Chase (ticker: JPM), which reported a 50% drop
in profits and whose shares promptly enjoyed a sharp gain.
The bank's top man, James Dimon, in releasing its lower earnings report, termed the economy weak and likely to
get weaker and ventured that capital markets will remain under stress. He also warned that losses on prime
mortgages (the cream of the crop that is turning sour, big-time) could triple. Mr. Dimon, rather a class act in a field
not abounding in them, gets high marks for his candor. As for the eager beavers who shrugged off his cautions and
rushed to buy the stock, we give them an investment grade of "F," for frivolous.
And for all those hopeful souls who have been champing at the bit to buy because things could have been worse, we
say stick around awhile; they will be.
WHY WE'RE STILL BEARISH WAS SPELLED out starkly in a dispatch we received last week from Nouriel Roubini.
Nouriel is a professor of economics at NYU Stern School of Business (but don't hold that against him) and runs an
economic advisory firm called RGE Monitor that casts a knowing and clear eye on the global financial and economic
scene. We think he's top-notch (which means we agree with him, a lot of the time).
The nub of his argument is that we're suffering the worst financial crisis since the Great Depression, and he
proceeds to give chilling chapter and verse. He predicts that hundreds of small banks loaded with real estate will go
bust and dozens of large regional and national banks will also find themselves in deep do-do.
He reckons that, in a few years, there'll be no major independent broker-dealers left: They'll either pack it in or
merge, victims of excessive leverage and a badly flawed and discredited business model.
The Federal Deposit Insurance Corp., after it gets through picking up the pieces of IndyMac, will sooner or later have
to get a capital transfusion, Nouriel asserts, because its insurance premiums won't cover the tab of rescuing all the
troubled banks. He foresees credit losses ultimately reaching at least $1 trillion and anticipates a heap of woe for
credit purveyors across the board.
The poor consumer, he contends, is shopped out and being hammered by falling home prices, falling equity prices,
falling jobs and incomes, rising inflation. The recession he anticipates will last 12 to 18 months. And the rest of the
world won't escape: He looks for hard landings for 12 major economies. As for the stock market, he hazards that
there's plenty of room left on the downside. In fact, he feels the bear market won't end until equities are down a full
40% from their peaks.
We must say this vision is a mite too apocalyptic even for us. But Nouriel is not a professional fear-monger out to
make a splash with end-of-the-world prognostications He's a sound guy with a solid record and an impressive
résumé. We obviously believe his views are worth pondering, even if they ruin your appetite.
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved