Capital Markets Update

By Louis S. Barnes                      Friday, August 10th, 2012

In the absence of meaningful US data, ECB rattling of the printing press has taken away some of the fearful bidding for Treasurys (10-year T-note in four days from 1.49% to 1.72%), and mortgage rates have risen a little as well. For us to return to interest rate lows or set new ones requires Armageddon over there or recession here.

Instead, odds have risen for a new European can-kick, held for the moment by a new standoff: Spain and Italy need a lot of money, but those with the money will not offer it until asked. Spain and Italy will not ask until they know what strings will be attached. (No, I am not making this up.)

Italy is the less weak of the two, and thus expects its promises alone will do, no strings. Spain already has strings: to cut its 8.5% of GDP budget deficit to 6.5% this year, to 4.5% next year, and to 2.8% in 2014. It’s chances are about even with a six-legged, eight-eyed critter snapping an Instamatic at Curiosity. New strings would force Spain to give control of its budget to the euro Gestapo. The next inadequate and temporary can will be kicked as soon as Spain decides to the right thing: lie.

Here at home, genuine good news, adding to the up-push on rates, and to the Fed’s evident wish to defer more easing: housing really is turning. We get housing data in a constant stream from dozens of sources, none definitive because “housing” is an a aggregation of a gazillion micro-markets, and measuring national trend is an art form. The sources range from the imaginary (Zillow), to permanently loopy (NAR), to perma-bear (Gary Shilling), and financial analysts have an especially hard time grasping a market so different from theirs (no exchanges, no uniformity, no mobility…).

One of the best sources: mortgage-insurer MGIC’s quarterly Market Summary, notable for descriptive adjectives on a single page, no numbers or percentages, and the right balance of detail. 73 metro areas are rated strong-stable-soft-weak, and further by change underway, softening-improving. In the best ratio in a half-dozen years, 12 are improving versus two softening, and in markets changing rating in the last 90 days the score is 9-0. MGIC also dropped its credit redlines of Arizona, Florida, and Nevada.

However, the MGIC measure of how far we have to go: 20 metro areas are weak, 25 soft, and 28 stable. Not one is rated “strong.”

To grasp the difficulty ahead, the policies that have hurt, and the ones that would help, nothing beats NYFedPrez Bill Dudley’s speech on January 6. One of a volley of papers delivered by the Fed that week, not one idea in it or the others has been adopted or advocated by the administration, by either party in Congress, or by any Republican Presidential contender. (Exception: HARP underwater refis are happening in volume, but based on frequent client testimony I am suspicious of overcount by inclusion of non-HARP loans, possibly intentional by lenders looking for gold stars.)

On the essence of housing as cause of this weak economy Dudley says, “Since home values peaked in 2006, homeowners have lost more than half their home equity — about $7.3 trillion. At present roughly 11 million households are in negative equity with the aggregate amount of negative equity estimated to be roughly $700 billion.”

Credit is too tight. “70% of new prime conforming loans go to borrowers with Fico scores 760 or above, versus 30% before the crisis.” The response of lenders to the crisis has been punitive and self-defeating: “Fees for new purchase mortgages should be based on the expected losses on these mortgages — not the realized losses on loans of earlier vintages.”

Dudley also called for more loans to investor buyers. And for an end to open-season loan-buyback demands, to be replaced by requirements for material defect, imposition of time limits, and to give buyback relief for loans defaulting after job loss.

And an equitable means of principal reduction: “The borrower could be given an open-ended option to pay off the loan at an LTV of 125 percent, and the right to pay off the loan at an LTV of 95 percent after three years of timely payments.”

Of all the policy mysteries today, how advice like this can be ignored is beyond me.

A Liitle Good News Goes A Long Way :-)

Capital Markets Update

By Louis S. Barnes                                    Friday, August 3rd, 2012

This bizarre time resembles a sci-fi epic involving three alternate universes, one real and two political, at each change of scene each universe moving more distant from the others.

Reality first. Today’s reported 163,000-job net gain in July has surprised markets expecting more bad news, and thus triggered a short-covering rally in stocks and a dumping of safety-bought bonds, market moves magnified by thin attendance during vacation season. The job gain was half-again the forecast, but other aspects of the report were as weak as prior months: more part-time workers unable to find full-time jobs, and fewer people in the workforce able to find any work at all.

The ISM reports for July were on the cusp of weakness, manufacturing shrinking slightly at 49.8, the service sector at 52.6 a hair better than hoped. June personal income grew .5%, spending not at all. June factory orders were expected to rise and instead fell .5%; excluding a nice month for aircraft, orders tanked 1.8%.

Mohammed El-Erian, CEO of bond-fund-giant Pimco, reviewing global data: “A serious slowdown is underway.” Nothing off-table, all in slow motion, but nothing evident to stop it.

The much-anticipated Fed meeting this week brought… nothing. Possible internal discord, possible internal doubt about what-when-how to act, but politics for certain. As any Presidential election approaches, the Fed seeks invisibility for fear of accusation of favoritism. The Left universe wants a free-money rescue, and the Right wants a good-ol’-days cash-’n-gold economy. And everybody should have a horse. And cave.

Even more dramatic expectations for the ECB meeting yesterday ended with something: universal contempt for its president, Mario Draghi. All talk, no walk. Resume item soon: “Second and last president of the ECB.”

The UK Telegraph says that Germany would support a rescue of Spain if it surrenders control of its fiscal affairs and graciously accepts Grecian assisted-suicide. Universes moving apart. The Telegraph’s Ambrose Evans-Pritchard has for years been in front of the euro mess, and said this week that Italy’s un-elected academic Mario Monti is “the de facto prime minister of the Latin bloc, working hand in glove” with the White House and all-think no-do Tim Geithner. Possibly because nobody else in Europe wastes time with them.

The deepest and longest-running weakness in the world has been rising Asia undercutting Western wages. Right behind it: the Western accumulation of ruinous debt in a desperate effort to maintain its standard of living. Some of those accumulators can make it, and some cannot. The longer we go pretending that all are going to make it, the greater the damage to all economies and the larger the ultimate losses.

The Left everywhere wants a central banking miracle: in a reverse of loaves-and-fishes, make the debt disappear. The Right reflexively resists, but offers nothing except to pull everyone’s plug at once.

Central banks can hose cash to put down bank runs, and they can be used as bridge lenders or temporary guarantors during extended recessions. They do not however, have transporter rooms in which debt can be sent to Zircon 22.

Every finance-type I know is slack-jawed at the sight of it all. One wise and tough Scot, retired international executive Neil Palmer: “If I were back at it… would I invest in new capacity? Hire? Of course not.” Every one is trying to calculate the moment of breach, and has given up on leadership, just trying to identify the market or economic tension that would trigger the break. And going deeper into cash.

Here is a paradox: as the universes fly apart, Left-Right-Real each red-shifting away from the others, the ultimate outcomes are converging on two singularities. Either some leadership rises to manage an orderly kind of global bankruptcy triage, softening the consequences of default, restructuring, and devaluation, or one day physical forces will overtake all voluntary options.

The good news is questionable.

Another Good Week For Rates

Capital Markets Update

By Louis S. Barnes                                      Friday, July 20th, 2012

It is high summer, a scorcher, even mad dogs looking for shade. It's supposed to be a nothing-happening time. However, the anxious suspense in markets is as high and hot as the sun.
     Everyone knows that the US economy has lost momentum. Perfesser Bernanke on Tuesday twice in one page used "decelerated," followed by "…the generally disappointing tone of recently incoming data." Everyone expects that the Fed will do something, but nobody knows what or when, possibly not the Chairman.
     Bernanke vaguely mentioned use of the Fed's balance sheet, "QE3' the shorthand, but no one outside the Fed can tell if action is held up by internal politics (resistance by the regional-Fed hardheads), or by doubts of QE effectiveness, or by desire to keep powder dry for something more troublesome than a slow patch.
     The primary purpose of QE has been to knock down long-term rates, but markets have already done that, the 10-year T-note to 1.46%, and mortgages to 3.50% (if someone answers the phone). The secondary purpose has been to encourage risk-taking by investors and lubricate lending, but credit is choked by regulation and post-Bubble over-reaction. Bernanke: "…Prospective homebuyers cannot obtain mortgages due to tight lending standards." In the Fed's most-recent meeting minutes, the only group agreement in 12 pages was the plaintive wish for new ideas to help the economy.
     The Fed should hold something in reserve to meet two contingencies: a failure to defer the fiscal cliff now five months away, and/or a euro collapse. The fiscal cliff is actually nearer by. We are only three months from election. Mr. Obama has been unable to make a deal with the current Congress; whether he is re-elected or the lamest of ducks, Congress will remain the same until January.
     Europe is like watching the Liar on Saturday Night Live. Day after day after day after day leadership says everything is fine, going according to plan. Right. This week Finland's short-term sovereigns went to negative yield, and Spain's 10s rose to 7.20%. Marker: for the moment French debt is still receiving flight-to-quality cash, its 5-year down to 0.86%. When markets realize that French banks, budget, economy, and trade deficit are in sum no better shape than Italy, and French yields begin to rise….
     On to something understandable: US housing. For once, NAR has properly explained the  drop in June sales of existing homes, down 5.4% from May, up 4.5% from June 2011. The primary reason: a scarcity of the cheapest distressed inventory, the darling of cash-paying investors. Listed inventory is down 24% versus last year.
     Does this pattern mean anything? For the economy, or housing in general?
     No. Not yet.
     Listed inventory is merely apparent supply. The shadow supply lies off-shore like ocean swells not yet formed into waves. The most deeply distressed inventory, not yet seized in foreclosure, let alone listed, seems to be down from 4.5 million homes to 4.0 but replenished by constant inflow of new delinquency in shaky-economy feedback.
     Some especially favored local markets like mine in Boulder, like Saudi Dakota, and as in any IT paradise are doing remarkably well. The rest of the country… how can the inventory/sales ratio fall so far and prices not rise? Because we still have at least 15% of homes under water versus mortgage, most owners still making payments; many new sales merely recognizing the pre-existing loss, hardly encouraging to sellers or buyers.
     Supply/demand thinking by finance types when the Bubble blew was wrong then and still is. Prices crashed far below "clearing prices" and resulted in more sellers and fewer buyers; now it will take quite a while to work off immense but latent inventory.
     Media also focus on sales of new homes. Although rising a little, they are not particularly useful, except to the stock prices of builders. The GDP contribution of new construction even in good times is low-single digit. For a better economy we need home prices to rise to repair household balance sheets, and every percentage point will mean fewer homes under water. And for that, as ever since 2007, we need credit.

Capital Markets Update

By Louis S. Barnes                         Friday, July 14th, 2012

Mid-summer is known in the news biz as “silly season.” In the absence of real news, headlines run “MAN BITES DOG.” It’s a little early this year, but it got hot early. The usual time is on the cusp of July to August, when Europe shuts down for a month’s vacation; this year Europe may shut down somewhat later, for longer.


Only one piece of hard economic data this week: the small-business surveyor NFIB dumped three points of index-optimism in June. That’s a lot for a single month, but the overall index value is still in the middle of the chatter back to 2010. The T-R/UofM measure of consumer confidence fell in July versus expected gain. Confidence measures are among the softest of data, but usually rise when gasoline falls — not so now.

Then the sillies….

The US Treasury auctioned $21 billion in new 10-year notes at an all-time record-low yield 1.46%. There were 3.5 times as many bids as bonds, and 45% of the bids were “direct,” non-competitive, often from overseas (we don’t care what yield we get, just give us the bonds), both measures of volume double normal.

Yields on short-term government bonds issued by Germany, Denmark, and Switzerland touched new-record negative returns, investors paying interest to borrowers to keep money someplace safe from the euro collapse.

The Swiss are trying desperately to hold down the value of the franc, pushed up by safety buyers. As the franc rises the Swiss feel rich, prices falling on any product or commodity sold in another currency; yet the franc rise threatens to put Switzerland out of business. Midas knew about that. The standard strategy to weaken an over-strong currency: print wads of its own and buy the other currencies. The Swiss now hold foreign exchange equal to 65% of Swiss GDP, upward pressure on the franc unrelieved.

Spain’s new Rajoy government, confronted by depression, announced a new package of $100 billion in spending cuts and tax increases. Spain’s banks as of the end of June now owe the ECB $411 billion, about 30% of Spain’s falling GDP, secured by trusty Spanish collateral.

Bank regulators in the US and Europe are focused on Libor irregularities in 2008.

Has anyone seen US Treasury Secretary Tim Geithner?

President Obama said yesterday that he had been too focused on policy and had not delivered enough inspiring speeches. The crusty CEO of one of my first employers: “Mr. Barnes, here we value people who do things, not people who talk about doing things.” Mitt Romney is trapped in Nixon’s Law: “To be a Republican President, one must campaign far enough to the Right to be nominated, and then move far enough to the center to be elected.” Mr. Romney will deliver his acceptance speech to the Republican convention on August 30 (counting the hours, aren’t we…). If he has any centrist thought, and says it before August 30, the fruitcake half of that convention will walk out on him before he gets there. This week the new Consumer Financial Protection Bureau released its first project. Not quite 1100 pages to explain its re-crafting of the 3-page Good Faith Estimate, which had been re-done in 2010, that a totally incomprehensible three pages to replace the previous one-page document which everyone had understood for the preceding 40 years. The new one will be better, but still on the same trail (visual: dim bloodhound following scent of hambone tied to merry-go-round while real perps depart scene). Consumer protectors are just certain that there is nothing to getting a mortgage beyond getting the best price. And that no banker should be paid for skill, or varying difficulty of application, and that a banker’s sound financial counseling has no value. An alternate approach to mortgage shopping: ask simple questions. How long have you been making loans? Do you have a resume? References? While making eye contact: Can I trust you to look after me? Why? How will you do it? What skills do you have to offer me that others do not have?



Dream on. Silly season.

Capital Markets Update

By Louis S. Barnes　　　　　　　　　　　　Friday, July 6th, 2012　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　

First some data, then Libor. Tempest or titillation? The effects from global markets to your adjustable-rate mortgage — earth-shaking? Or teapot-tilting?

June jobs data are as-was in May and April: 75,000 new jobs, poor, but afloat! The June ISM data is more concerning, overall to 49.7 from 53.5, and “internals” crashing: new orders down 12.3 to 47.8, and prices of raw materials collapsed another 10.5 to 37 (inflation risk is zero). For comparison, China and all of Europe are lower in the 40s, Spain below the 44 marking serious recession.

Libor. London Inter-Bank Offered Rate, complied by the British Bankers Association since 1986. Compiled by survey, not independently verifiable market benchmark, posted at 11AM GMT each day in maturities overnight to one year and in 10 currencies.

All floating-rate IOUs are tied to an index of some kind, the chatter on trading floors all day every day “over” — over US Treasurys, British gilts, German Bunds, over Libor. Nobody knows how many hundred trillion dollars’ worth of securities are tied to Libor.

The first US ARMs appeared in volume in 1980, most commonly tied to COFI, 1-year Treasurys, and Libor, each plus a spread, aka “margin.” COFI was the average cost of a deposit to an S&L in CA, AZ, and NV (only). Yes, the rate you paid to an S&L was determined in part by the rates that it decided to pay its depositors. Margins ran from over 3.00% to below 2.00%. COFI loans were a Bubble casualty, finished by Lehman.

The Treasury stopped selling 1-year T-bills in 2001 because we were in budget surplus (what a thought…), and before it began again in 2008 the index value in your mortgage adjustment was inferred by statistical artifact (CMT). Fannie margins for this most-common index have been 2.75%. However, the Fed at 0% since 2008 has pulled the 1-year down to 0.19%, farther than ever imagined, and T-bill-tied ARMs are scarce.

If you have a one-month, three-month, six-month, or one-year Libor ARM, you pay 2.25% over the equivalent Libor maturity. The 0.50% difference between margins over Libor and T-bills reflect the ’80s-’90s spread between bills and Libor. Not now! One-year Libor is 1.069% today, plus margin a “pay rate” of 3.319 versus a T-bill-tied 2.94%.

Every ARM promissory note contains a provision for a replacement index (un-named) if the one in the note becomes “unavailable.”

Back to the tempest. Apparently between 2005 and 2010 bankers surveyed by the BBA began to fib on the low side. To what effect — magnitude — nobody seems to know, but in an index measured to three decimal places, not much. But, a hell of a lot of money moves by each one-thousandth. Some motivation to fib was ordinary cheating, but some was self-protective, not wanting to tell a panicked world how much your bank had to pay for funding.

Everyone in the market knew that Libor was somewhere between inexact and imaginary, and banker-determined; regulators knew that the BBA survey had “irregularities”; and the financial press routinely ran stories about Libor rigging. Everybody-does-it is a poor defense, but deep inside inexact markets everybody must stick a wet finger into the wind and announce velocity.

Everybody does something else: everyone wants precision in life beyond our ability to have it. Thus we live in constant, comfortable, and fabricated illusion, and we are enraged when our self-deceptions are exposed.
To have rigged Libor was a Bad Thing. The downside rig did cause losses in some heavily structured finance — “inverse-floaters” — hurting those who tried to outsmart future interest-rate probabilities.

To have rigged Libor during the greatest bank run of all time, every financial institution and the system itself facing panicked suspicion… that was a Stupid Thing. The stupid should resign forthwith.

However, relative to our current predicament and bad deeds private and public, this Libor thing is whitecaps in a thimble. A microscopic storm has morphed into yet another hysterical witch-hunt. Be damned careful. There are good witches and bad ones, and when the bad ones are loose you’ll wish you hadn’t dropped a house on your good one.