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HomeFHLBs: Red Sea, Dead Sea or Both?
Posted by Larry Doyle on May 25th, 2009 8:46 AM |
On April 2nd, in a post Putting Perfume on a Pig, I compared Freddie Mac, Fannie Mae, and the Federal Home Loan Bank system to the Red Sea. Why? For the very simple reason that for the foreseeable future, these entities will accrue losses. How? Unlike commercial banks, Freddie, Fannie, and their 12 FHLBs have very little earnings power in this environment while faced with a steady stream of losses on their mortgage holdings given ongoing defaults and foreclosures.
In retrospect, would it have been more appropriate to compare the FHLB system to the Dead Sea than the Red Sea? I think it may. As the Wall Street Journal highlights, Directors Are Faulted at Home Loan Banks:
Financial troubles at some of the Federal Home Loan Banks are raising questions about how well directors of these institutions are supervising their executives.
A plunge in the value of mortgage securities bought by several of the regional home-loan banks has forced them to halt dividends and curtail funding for local housing projects. An annual report issued by the banks’ regulator this past week says some of them “paid insufficient attention” to credit risks and haven’t invested enough in information technology.
Unlike giant banks or government-backed mortgage companies Fannie Mae and Freddie Mac, the 12 regional home-loan banks draw little public scrutiny. (LD’s emphasis) Created by Congress in 1932 to support the housing market, they are cooperatives owned by more than 8,000 banks, thrifts, credit unions and insurers.
Why do these home loan banks draw such little public scrutiny? They are the wholesale entity (providing funds) to their retail network (banks, thrifts, credit unions, insurers) which deals with the public. With no interaction with the public, the media and market analysts have accorded them little coverage. Thus, I make the assertion that these banks truly are a combination of both the Red Sea (ongoing losses) and Dead Sea (no coverage). (more…)
NoQuarter Radio’s Sense on Cents with Larry Doyle Will Be Back Next Week
Posted by Larry Doyle on May 24th, 2009 2:00 PM |
In observance of Memorial Day weekend, NQR’s Sense on Cents with Larry Doyle will not be broadcast this evening.
I hope you are able to enjoy the holiday with family and friends while reflecting on the people and values Memorial Day celebrates. We are currently living through historic times, but we can never afford to forget the sacrifices of the special men and women who fought for our freedoms. God bless them.
Even though I will not be broadcasting this evening, if there are any questions or topics you’d like me to address, please do not hesitate to ask.
Thanks for your support!!
LD
London Calling: LIBOR Revisited and The Greenback
Posted by Larry Doyle on May 24th, 2009 8:27 AM |
The biggest developments in the market and economy this week were the decline in the value of our greenback and the move higher in long term interest rates (10yr U.S. government bonds moved to 3.46%, a level not seen since last Fall).
Despite these concerns, many analysts will point to the drop in Libor (London interbank overnight rate) as an indication of the increased confidence in the global banking system. I strongly disagree.
I believe the drop in Libor is not a reflection of the “fundamental” improvement in our global banking system, but rather a “technical” reflection of the supply of dollars that have been injected into the global economy. There is an enormous difference in these lines of reasoning and the implications they have for our markets and economy going forward.
If Libor were declining because of a “fundamental” improvement in the global banking system, it would be reflected in an increased flow of credit into the economy. That flow is not happening.
If Libor is declining because of a “technical” supply of dollars, then it would be reflected in a decline in the value of the dollar, an increase in long term interest rates, an increase in the prices of select commodities (gold has rebounded to $957/oz, oil is back above $60/barrel), and other inflation-related variables. Yes, we are seeing all of these developments.
Let’s revisit my post from May 15th, What Is Going On With Libor?
While many analysts were promoting the drop in Libor as a positive, I begged to differ and wrote:
Has the drop in Libor coincided with an improvement in the credit markets? No. Despite what pundits would tell you, credit spreads remain at elevated levels. In fact, on an inflation adjusted basis, rates are at the highest levels since the early 1980s.
Why aren’t banks lending as much? Lack of confidence in the economy along with enormous embedded losses in their current book of loans. Those losses are real and will be rising. The elusiveness of bank credit is highlighted in a McClatchy article, Businesses Struggle as Bank Loans Remain Elusive, in the Newsworthy section of Sense on Cents.
Thus, if a drop in Libor is not a reflection of improved credit conditions, what does it mean?
In my opinion, it is a precursor to a drop in the value of the dollar. Why?
Very simply, too many greenbacks floating around. A decline in the value of the dollar is inflationary. Both core rates of producer prices and consumer prices reported this week were higher than expected. I’ll be watching.
Please recall, there are always three factors that determine the level of a market: fundamental, technical, psychological. A move in Libor is almost always analyzed from a fundamental standpoint. However, in our Uncle Sam economy, we need to be increasingly diligent in reviewing all three of the aforementioned factors along with the implications they have for our global markets as we navigate the economic landscape.
LD
P.S. In light of the Memorial Day holiday, I will not be hosting NQR’s Sense on Cents with Larry Doyle this evening. I look forward to getting back at it next week. If you have any questions or topics you would like addressed, please do not hesitate to leave them and I will respond. Enjoy!! LD
Financial Advisers: “A Crisis of Confidence”
Posted by Larry Doyle on May 23rd, 2009 7:38 PM |
Are you confident in the financial advice you are receiving?
A recent report in InvestmentNews, Financial Advisers Face a Crisis of Confidence, indicates that an overwhelming number of investors are not happy with their financial advisers. In fact:
About 80% of affluent investors — that is, those with more than $500,000 in investible assets — are “disgusted with their adviser because their adviser is spooked,” he said.
Wow!! How is it that such an overwhelming percentage of investors can develop disgust with their adviser? Very simply, as with any service, if you are not getting professional coverage for the fees charged, a level of disgust can easily develop.
Based on my experience, I have dealt with a wide range of professionals in this field. A small percentage are outstanding, a few more are more than satisfactory, a large percentage are decidedly mediocre, and plenty are borderline, if not totally incompetent. I would venture to say the same assessment could be made of many professions. How does this happen?
Financial advisers are primarily trained to do two thngs: sell products to generate commissions and gather assets to generate fees. I have been involved in training programs as participant and adviser. Additionally, I have been solicited more than I care to remember. All too often, I have experienced people and programs geared toward products and services.
Very infrequently have I experienced programs and people that fully understand the dynamics at work in the economy and markets. Additionally, I have very infrequently experienced people who truly care to learn and understand the customer’s needs and how they can help solve the customer’s issues. Why?
The salesperson or adviser is too focused on writing immediate business and moving on to the next sale. What is the result? (more…)
Let’s Cross the Pond and Revisit The Weakest Link
Posted by Larry Doyle on May 23rd, 2009 2:27 PM |
The Washington Post is running a lead article today about the concern that the European Union in general, and the United Kingdom specifically, may derail the global recovery. Let’s cross “the pond.”
European Slump May Stall Global Rebound
Some countries, such as Ireland, are so cash-strapped that they’ve raised taxes in the middle of a deep recession, making things worse. In addition, European leaders have only recently signaled their willingness to conduct broad, systematic stress tests on their financial institutions, similar to the ones on major U.S. banks already concluded by the Treasury Department.
This is not news. Nothing of substance has dramatically changed in Western or Eastern Europe from my writing, The Weakest Link and The Weakest Link Is Weakening in late February and early March.
The media, government officials, and market pundits have been been attempting to talk the economy up more than the actual reality would dictate. The equity markets rebounded from an oversold condition in early March. For short term traders and those focused on technical analysis, I hope you caught the move. For those focused on the long term fundamentals of the economy, the risks remain very high.
While, WaPo and other media outlets may voice concerns now or report developments as new, the “strains in the European chain” remain very real. Along these lines, I had written on April 30th in my April 2009 Market Review: Brave New World:
I believe it is a question of when – not if – in terms of a major European country defaulting on its debt and requiring a rescue from the EU and/or IMF.
The Washington Post should be a little more rigorous in terms of checking their facts. They report:
While U.S. banks have already written down about half the estimated $1.1 trillion in troubled loans and toxic assets on their books, Europe’s financial institutions have thus far written down less than 25 percent of their $1.4 trillion in bad debts related to the crisis, according to a report from the International Monetary Fund.
In actuality, the IMF has forecasted that U.S. banks have upwards of $2.8 trillion in troubled loans and toxic assets and have written down approximately 40-45% of it. That’s bad reporting. At least the reporter is diligent enough to highlight that Western Europe’s major concerns relate to the financial exposure to Eastern Europe. Although, this is not new news, they report:
Many major Western European banks are also heavily invested in hard-hit Eastern Europe, where the risk of a fresh wave of corporate and consumer defaults is considerable.
With all due respect, tell us something we don’t know.
LD
Let’s Listen to Trust Company of the West’s Jeff Gundlach
Posted by Larry Doyle on May 22nd, 2009 5:06 PM |
Jeff Gundlach, Chief Investment Officer of TCW (Trust Company of the West) is widely considered to be one of the sharpest, if not THE sharpest, bond manager on Wall Street.
Let’s listen to him address the dynamics of the bond market, in general, and the mortgage market, specifically:
Let’s also listen to Mr. Gundlach address the dynamics within the housing market:
Glad to bring the best in the business to you here at Sense on Cents.
LD
Obama Isn’t Concerned About Change In Credit Rating
Posted by Larry Doyle on May 22nd, 2009 1:58 PM |
White House Press Secretary, Robert Gibbs
Bloomberg reports, Gibbs Says He Doesn’t Believe U.S. Credit Rating Will Be Cut:
White House Press Secretary Robert Gibbs said he doesn’t believe the U.S.’s AAA credit rating will be cut.
In response to questions at his regular briefing, Gibbs said President Barack Obama isn’t concerned about “a change in our credit rating.” Asked if he expects a cut, he said, “I don’t believe they will be cut.”
Investors sent U.S. bond and currency markets lower amid concern for the AAA rating after Standard & Poor’s lowered its outlook yesterday on the U.K.’s AAA rating to “negative” from “stable.”
A few comments and questions . . .
1. Gibbs should know better than to make a casual comment about our sovereign credit rating. The market listens to every word emanating from an administration to detect the level of seriousness and “risk management” being employed.
2. Is Gibbs indicating that President Obama isn’t concerned in that he does not believe the rating will be cut, or does not really care if it is cut? There is an enormous difference in those interpretations. Gibbs should not be vague.
3. When asked his own opinion, Gibbs provides a glib response without substance. He does not inspire confidence!
The Press Secretary needs to understand that the markets listen, monitor, study, and react to each and every word from the Administration. I, and others, want greater clarity from our financial leaders in Washington. Ben Bernanke and Tim Geithner pick and choose their words very carefully knowing that Wall Street picks up on every nuance. Gibbs should take a lesson on addressing economic and financial topics.
Wall Street and every other financial center in the world detests an official who dismissively passes off a topic of very serious substance.
Why and how do things like this happen? Inexperience and little market knowledge.
For what it is worth, from the time of this news release, long term interest rates increased another 3 basis points.
LD
What Does A Declining Dollar Mean?
Posted by Larry Doyle on May 22nd, 2009 11:21 AM |
On the heels of comments yesterday by Bill Gross of Pimco that the implied AAA credit rating of the United States will eventually be downgraded, our dollar is being hit hard again today. Let’s address some questions about a weaker dollar:
1. What are the implications of a weaker dollar?
– more expensive to travel overseas
– higher inflation here at home
– perceived greater risk of holding the currency and dollar denominated assets
– given the greater perceived risk, investors will demand a higher rate of return. In other words, interest rates will head up (and are currently, especially longer maturities).
2. What are the risks?
– significant exit of foreign capital from our market. Can you imagine the conversations going on around the world, but especially in China and Japan the two largest foreign holders of our debt?
– as our economy is forced to pay higher rates to attract capital, the economy slows as the cost of debt service increases.
3. Are there benefits?
– in a perverse way, I think our political leaders actually want a somewhat weaker dollar. Why?
– A weakened dollar will help domestic production of goods relative to our continued reliance on imports.
– generating some inflation is a de facto means of devaluing our outstandng massive amount of debt. Whomever is in debt currently can actually pay back those debts in future dollars that are worth less.
– however, having the dollar decline in value marginally is akin to getting a little bit pregnant.
4. How do you stem the decline in the value of the dollar?
– increase short term interest rates, that is, the Federal Funds Rate (currently sitting at 0-.25%) will have to go higher. What does that mean? Higher rates lead to a slowing economy. Although given the current economic turmoil, the Fed may have to increase the Fed Funds rate even sooner than they desire and we could suffer through a nasty bout of STAGFLATION.
Playing with the valuation of the currency and not defending it is a VERY dangerous game.
LD
Turbo-Tim Gets Defensive About Deficit
Posted by Larry Doyle on May 22nd, 2009 6:00 AM |
After the biggest one day selloff in U.S. government debt in a long time, U.S. Secretary of the Treasury, Tim Geithner, got very defensive this afternoon about the explosive growth in the U.S. deficit. Bloomberg reported, Geithner Pledges to Cut Deficit Amid Rating Concern.
Well, perhaps Secretary Geithner could help Barack and team find more than .5% of his $3.5 trillion budget to cut as a start if he is serious about his pledge. Over and above that, Tim asserted:
that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”
Benchmark 10-year Treasury yields jumped 17 basis points to 3.37 percent at 4:53 p.m. in New York.
With all due respect to the Secretary, perhaps he may want to review the fact that the overall Treasury funding needs in calendar 2009 will likely exceed the funding needs of 2006, 2007, and 2008 COMBINED. Additionally, he may want to have a chat with the governors of the Federal Reserve. In the minutes of the most recent Fed meeting, the consensus forecast for growth, unemployment, and inflation is worse than what the governors foresaw in January. Perhaps the Secretary may want to reconcile his statement with those forecasts.
Tim did hedge his bets and cover his flank by commenting that:
it’s still “possible” that the unemployment rate may reach 10 percent or higher, cautioning that the economic recovery is still in the “early stages.”
I do not pretend to think that Geithner has an easy job, but ultimately the market and investors will more value a secretary, spokesman, or analyst who is truly credible than merely an administrative mouthpiece. In my opinion, Tim has a lot of work to do on this front.
LD
Sense on Cents On Economy and Markets: Lets Look Back to Look Forward
Posted by Larry Doyle on May 23rd, 2009 8:50 AM |
The developments in our global economy are so large in scale that it is of paramount importance to develop a macro view. David Swensen, Yale’s head of investments and widely regarded as the top portfolio manager within college and university endowments worldwide, says as much in an interview reported by Bloomberg:
I concur. In that spirit, let’s look back at my outlook from last October so that we can more clearly look forward as we navigate the economic landscape.
Excerpts, with current commentary, from The Economy – What Lies Ahead (originally published October 14, 2008):
I still maintain this premise. The move down in the economy last Fall led to an initial move lower in rates on government bonds. Our central bank and other central banks have subsequently supported the economy via quantitative easing (central bank purchasing of government and mortgage-related assets). That said, we are now entering the stage where the global demand for credit is swamping investors’ and central banks’ ability to provide it and rates are moving higher. I believe this move to higher rates, especially in the government and mortgage sectors, will continue. Rates for municipal and corporate bonds should also be forced higher although not as much.
I continue to believe we will experience stagflation. Comments by Bill Gross of Pimco highlighting the potential likelihood of the United States losing its implied AAA credit rating adds fuel to this fire.
Individuals, corporations, and governments still need to delever (pay down debts) and will be forced to sell assets in the process. As such, while I think selected sectors of the equity market may hold up, I remain concerned about the overall market. I think the U.S. dollar and other currencies of overlevered (big fiscal deficits) nations will suffer. These developments are inflationary. To defend one’s portfolio from inflation, gaining exposure to TIPS (Treasury Inflation Protected Securities) is prudent. Mr Swensen addresses this point in the aforementioned interview.
While rates on CDs and other short term deposits have come down, I still believe it is prudent to remain defensively positioned at this juncture. As the liquidity needs increase – and they are – opportunities will develop in a wide array of markets. While it may be prudent to buy short term bonds of highly rated companies, I still think people should keep plenty of dry powder. Within equities, companies with pricing power (ability to increase prices in an inflationary environment) will outperform.
I very much believe this and maintain this viewpoint.
I also maintain this premise. I believe we will experience double digit unemployment this year given the problems in the automotive (production, parts, and dealers), and municipal sectors (forced cuts as tax revenues plummet. California is the poster child!!). Retail sales will remain low keeping domestic production and imports also depressed.
Please share your thoughts and opinions. Each and everyday is a microcosm, but we need to maintain the macro view as we navigate the economic landscape!!
LD
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