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     holycow
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Username: holycow
Post Number: 3416
Registered: 08-2004
Rating: N/A
Votes: 0
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| | Friday, November 16, 2007 - 05:01 pm: |  
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http://tinyurl.com/yph8dp - Subprime mortgages, subprime currency
Subprime Mortgages Lead to Subprime Currency
By John Lee, CFA
Nov 14 2007 8:59AM
www.goldmau.com
Last Thursday, according to Financial Times,
Mr Bernanke told Congress he would support raising the limit on the size of the individual loans eligible for securitisation by the government-sponsored mortgage finance entities from $417,000 to $1m (€680,000, £475,000) on a temporary basis.
He suggested that Fannie and Freddie could pay insurance premiums on these loans to the federal government, which would "act as guarantor" by taking on some of the credit risk.
Charles Schumer, the Democratic chairman of the Joint Economic Committee, enthusiastically welcomed the idea and said he would try to insert it into legislation already before Congress.
It came as Mr Bernanke told Congress that estimates that set the total losses from subprime mortgages at about $150bn were probably "in the ballpark". ( http://www.ft.com/cms/s/0/6b9aebd2-8e65-11dc-8591-0000779fd2ac.html?nclick_check=1 )
Given that the Fed and European Central Bank have already injected well over US $150 billion since August, Bernanke obviously lied about his ballpark figure. But just how big is this subprime mess?
To measure subprime losses, we have to first find out the size of the subprime market. Fed data pegs the total US residential value at US $20 trillion and the US residential mortgage market at US $10 trillion. This number is substantial, as it eclipses the US treasury market of US $9 trillion.
Of the US $10 trillion mortgage market, GSE (Government Sponsored Enterprises) hold about $1.5 trillion, leaving $8.5 trillion in private hands. Within this US $8.5 trillion, we have various grades and categories, with grades ranging from AAA, AA, Alt-A, BBB, and categories such as the traditional 30 year fixed, and non-traditional ARM, ARM with teaser rate, interest only, and negative-amortization.
The exact definition of subprime is not clear, with various sources estimating that the total subprime portfolio is between $1.5 trillion to $3 trillion. To precisely breakdown US $8.5 trillion by categories proved to be difficult. Nonetheless below is our estimate. We have valued the subprime market at $2 trillion. This is in line with an estimate by MSNBC reporter and research firm First American Loan Performance. ( http://www.msnbc.msn.com/id/20216643/ )
So just how much of the $2 trillion subprime position is lost? Various sources including First American Loan Performance estimated a default rate of 15%, this would translate to $300 billion of non-collectable principal and interest.
That in itself is not a big deal, as every year the United States spends well over $100 billion in Iraq and $400 billion in military separately. The real concern is how such defaults are affecting the value of the existing outstanding subprime portfolio. In other words, would you eat beef knowing one in ten cows is a madcow?
C:\Users\tondeuse\Desktop\madcow.jpg
We follow the ABX index published by Markit.com, which is the basket of derivatives linked to subprime securities. As financial tools go, this index is far from perfect, since it is barely two years old, and tends to be thinly traded.
But right now it has the unfortunate distinction of being the only tool easily available to measure sentiment in the opaque subprime securities world. And in the past couple of weeks, the message emerging from this measure has started to look utterly dire, as it shows subprime mortgages are changing hands at 25 cents on the dollar.
http://www.markit.com/cache/curves/e890be228e97d7846e8cd26207c.png
( http://www.markit.com/information/products/abx/history_graphs.html ) As we have shown in the pie, this 80% haircut applies to potentially $2 trillion worth of mortgages if investors of those mortgages were to exit today. The loss is not $150 billion, but more like $1.6 trillion.
What’s more, the ABX shows that since September 2007, the value of AAA mortgages has begun to crater, and now trades at a stunning 70cents on the dollar. This means if all AAA and Alt-A mortgage portfolios were to be marked to market, the loss will amount to another $2 trillion.
http://www.markit.com/cache/curves/96c465675d8c33c284f2fb95f93.png
Despite the fact that Ben Bernanke and the Fed moved to a neutral balance of risks assessment last week, the market now sees a roughly 55 per cent chance that the central bank will cut rates by another 50 basis points by the close of its January policy meeting, and an additional 15 per cent chance that it will cut by 25 points by then.
And now you understand why Mr. Bernanke was so frantic in lowering interest rates and proposing the drastic policy measure of tripling the GSE limit to $1 million. In essence Mr. Bernanke is trying to increase the share of GSE in the pie above and hopes the problem will go away.
The curious mind asks, who holds those $trillions worth of mortgages? Thanks to the genius of the American banking and marketing machine, just about every sizable institution underneath the sun with a fixed income portfolio. From Europeans to Asians, from Banks to Brokerages, from Hedge Funds to Pension Funds, Institution to Retail, Trusts to Endowments.
And allow me again to quote the FT.com article on Nov 1st.
…the experience of living through the Enron scandals earlier this decade means that the audit industry is now terrified that it could face lawsuits if it is perceived to be too lax towards its clients. So some now appear to be demanding that their banking clients reprice their mortgage assets according to the only visible market tool – namely the ABX. It is thus little wonder that some banks have suddenly been forced to increase their writedowns in recent weeks. Indeed, I would wager that the pernicious combination of ABX and the “Enron factor” is a key reason for the recent shocks emanating from Merrill Lynch.
However, the rub is that while auditors at some Wall Street banks are becoming quasi-evangelical about the need to reprice subprime assets, there are still other, vast swathes of the financial system which have not been touched by the full blast of transparency yet. Moreover, many financiers outside the world of Wall Street banks remain very wary of rewriting their mortgage assets to current ABX price levels, due to a lingering hope that the recent ABX slump will remain temporary.
Most of those aforementioned outfits are in a state of shock and have been reluctant to mark their $trillion+ subprime portfolio to market. Every other day there is new revelation of substantial subprime loss. First it was New Century in March, then American Mortgage and Countrywide in September, then it got worse as Wells Fargo, Bank of America, Credit Suisse First Boston, Citibank (albeit with a new CEO now) came out of woodworks. Last Friday it was Wachovia (US 4th largest), and on Tuesday it was Etrade. Not one major bank dealing with mortgages was immune. If there is such thing as systematic risk, we are sure looking at one, and therefore expect a lot more skeletons to come out of the closet in the months to come.
How about interest rates? Hiking interest rates on US debts is like giving a discount on MadCow infested beef, it’s not going to make a difference nor help its sale.
At this juncture, the Fed has no choice but to redeem any and all mortgages at near face value directly, through GSE, or offshore vehicles. The more the Fed redeems, the more dollars they print. When you print $1 trillion (10%) a year, people can reasonably swallow the extra money supply, but when you print a $1trillion in a hurry and in a conspicuous way, you are directly challenging money managers’ intelligence and you will see a squeeze in gold. It’s that simple.
No sane foreign institution is going to finance American home owners, and why should they when they can finance the Brazilians, Canadians, Thais, Russians, Chinese, Indians, with an appreciating currency? The dollar reserve status is now shattered. Mind you, it’s not that we are against the dollar in particular, we just don’t think any fiat currency deserves to be the world’s reserve currency.
To those who say gold is due for a pro-longed correction at $800, they are missing the big picture. To us gold’s run has just gotten started, the Emperor is now naked for all to see.
John Lee,CFA
johnlee@goldmau.com
www.goldmau.com
*** will come back to this piece in later year. Below are the graphic within the writeup.
*** this cow is quite mad, but I can assure you - IT IS NOT ME!
HC
... hopelessly addicted to charts!
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holycow
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Username: holycow
Post Number: 3578
Registered: 08-2004
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| | Tuesday, December 11, 2007 - 10:00 am: |
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...as at 10/12/2007
HC
... hopelessly addicted to charts!
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holycow
Member
Username: holycow
Post Number: 3582
Registered: 08-2004
Rating: N/A
Votes: 0
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| | Tuesday, December 11, 2007 - 04:44 pm: |
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http://tinyurl.com/2hcmox - Profit slump deepens recession fears
Timothy Aeppel The Wall Street Journal. | December 10, 2007
US corporate profits are being hammered by the slowing economy and credit-market turmoil, intensifying concerns that the nation may be headed for recession.
Banks and other financial companies, which have taken huge write-downs on soured bets on sub-prime mortgages, have been among the most visible casualties. But businesses ranging from makers of artificial hips to surf wear retailers to overnight-delivery services are also feeling the pinch.
If profits fall far enough, it could discourage capital spending and make companies less willing to hire or retain workers. A hiring slowdown could magnify the downturn and hasten a recession. That's bad news for wage earners as well as those who own stocks.
Weaker profits ultimately translate into lower stock prices, which could further erode the confidence of American consumers, who are already feeling less wealthy as fuel costs rise and their home values decline.
"The recession in reported earnings has already begun," says David Rosenberg, chief US economist at Merrill Lynch. "The underlying cause is a combination of painfully high energy prices and the general lack of pricing power in many businesses, which is starting to crimp margins."
Mr Rosenberg estimates profits, measured by the operating earnings per share of companies in the Standard & Poor's 500 stock index, fell 8.4 per cent in the third quarter from a year earlier. He expects those earnings to be flat or lower for the next five quarters.
Companies with most of their business inside the US are hurting most. Merrill estimates "domestic earnings," or profits derived from activities inside the US, have contracted in three of the past four quarters and have shrunk more than 4 per cent for the year, the worst reading in that gauge since the fourth quarter of 2001.
Most economists expect things to get worse before they get better. "We're facing a tsunami of earnings downgrades next year," says Mr Rosenberg.
The downturn in earnings started in sectors linked to housing but has spread far beyond. FedEx last month lowered its profit forecast for the current quarter and full year, marking the second time since September that the freight company has cut its outlook.
FedEx said the weakening economy and cutbacks in consumer spending were making for a weaker-than-expected holiday shipping season. Talbots, the women's clothing retailer, also blamed tighter-fisted consumers for a downward revision in its outlook for the fall.
Until recently, strong foreign sales were a saving grace for many US multinationals, offsetting softening markets at home and bolstering overall profits. The weaker US dollar played a role by making American goods more attractive to foreign buyers and helping boost the bottom lines of US companies when earnings in stronger foreign currencies were translated back into US dollars at the end of each quarter.
But the downdraft in the US economy is now overwhelming those benefits, economists say.
In 2007's first two quarters, S&P 500 operating earnings rose at a high single-digit pace from a year earlier, before dropping into negative territory in the third period. That weakness followed a remarkable growth run: Through the 14 quarters ended with the fourth quarter of 2006, earnings grew at a double-digit pace.
Richard Berner, chief US economist at Morgan Stanley, expects a "significant and lengthy" contraction in earnings, even if the US economy avoids a recession next year. That's because US companies have far more operating leverage now than at any time in the past.
Companies with high operating leverage have relatively high fixed costs, such as retail chains that must pay rent on dozens of stores regardless of how much is sold at each location or a manufacturer with factories full of expensive machines that must be maintained even if they aren't churning out products.
"Because of operating leverage, when the economy really slows down you get a much more pronounced impact on profits and earnings," says Mr Berner, because company results are hurt simultaneously by lower sales and thinner profit margins.
He says if the US economy grows only 1 per cent or 2 per cent next year, overall earnings might slip 2 per cent to 5 per cent. But if growth is lower, say flat to 1 per cent, earnings could fall by 5 per cent to 15 per cent.(so... what's this rally about? Growth prospect?)
Meanwhile, more companies are warning investors of dark clouds ahead. Zimmer Holdings, a maker of artificial joints, recently cut its projected range for fourth-quarter earnings by nearly 10 per cent, citing "lower anticipated sequential growth rates in the Americas."
The US accounts for about 95 per cent of Zimmer's sales in this region. Volcom, a maker of surfing and skating clothes, warned fourth-quarter profit would be lower because of the weakening US retail environment.(Warning bell for BBG!)
Overseas firms with US operations also are being hurt. Neopost Group of France, the world's second-largest maker of mailroom equipment after Pitney Bowes, recently cut its profit target and cited problems in the US.
Pitney Bowes also cut its outlook.
"We do a lot of printing and copying for financial companies, so to the extent that they're being hit by sub-prime and other factors, we're seeing some echo of that in their work with us," says Matt Broder, a company spokesman.
*** there are all kinds of news... of the lots, I find this kind of news significantly more important because it is highlighting key future concerns the market over there is likely to face, unless there's a sea change in the underlying fundamentals, it is unlikely that negative outlooks prescribed by various analysts, and companies in their quarterly report are going to change.
As an investor, you should take precaution and start taking the necessary action to protect your capital and investment, before it is too late. Remember, prevention is better than cure!
...and if you are buying the argument that ASX is still doing fine and the Aussie economy going strong with Asian sales, etc... well, you'd been warned - when the tsunami hits over there with the speculative funds pulling out of ASX, you will learn this very simple lesson - there's no safe haven for equity. It's just a matter how much(/large!) profit you give back, or how much capital you are slugged. That is when you find out lost profit=lost capital=pain!
As for the current rally, rejoice but just remember this - buy on rumours, sell on facts... take your profit while it is staring at you, or someone else will!
HC
... hopelessly addicted to charts!
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holycow
Member
Username: holycow
Post Number: 3630
Registered: 08-2004
Rating: N/A
Votes: 0
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| | Thursday, December 20, 2007 - 10:19 am: |
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as at 19/12/07
HC
... one day...!
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enigvista
Member
Username: enigvista
Post Number: 412
Registered: 10-2007
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Votes: 0
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| | Thursday, December 20, 2007 - 10:31 am: |
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# NOTE: Macquarie now trades under the ASX code MQG
# Ex-dividend date for 2007/08 interim dividend - 3 January 2008
# Record date for 2007/08 interim dividend - 9 January 2008
# Payment date for 2007/08 interim dividend - 30 January 2008
# 2008 full-year result announcement - 20 May 2008
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holycow
Member
Username: holycow
Post Number: 3632
Registered: 08-2004
Rating: N/A
Votes: 0
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| | Thursday, December 20, 2007 - 12:00 pm: |
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E,
Thanks for the info.
Cheers.
HC
... one day...!
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