Today’s Data


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Karim writes:

Last data before 12/30

  • Mtge apps up 48% last week (MBA reports record 83% of households looking to refi). Refi apps up 48.4% on the week, purchases 10.6%.

Lower interest rates now starting to help this sector, but at the expense of interest income for others. Much of this is offset by government, however, as the deficit continues to rise counter cyclically (the ugly way- lower revenues and higher transfer payments).

  • Initial claims rise 30k to new cycle high (and highest since 1982) of 586k; continuing claims drop 17k to 4370k

This may get a lot worse after the holidays.

  • Core PCE unch m/m and up 1.9% y/y (core inflation down 0.5% in 3mths; so much for the flat Philips curve).

Yes, but not all that big a move for a negative 7% quarter and a 70% drop in crude oil and large declines in other commodities.

  • Personal income down 0.2%, with wage and salary income down 0.1%.

Lower interest income biting.

  • Savings rate up to 2.8% from 0.8% 3mths ago

It’s not so much that people are saving as it is they are not borrowing, as total mortgage and other credit measures decline.

  • Personal spending down 0.6% m/m

Less than expected as lower fuel prices seem to be helping some.

  • Durable goods orders -1% (prior month revised from -6.2% to -8.4%) and up 4.7% ex-aircraft and defense (this measure was down 12.3% in prior 3mths so correction was expected).
  • Shipments (key for current qtr growth) down 2.6%

Falling fuel prices and automatic stabilizers increasing the federal deficit are beginning to have an effect, but this is a long, drawn out process that in the past has taken years to restore output and employment.

A full payroll tax holiday and maybe $300 billion in Federal revenue sharing with the states can cut that time frame down to months rather than years.

And, of course, without a plan to cut crude oil product consumption fuel prices can likewise quickly elevate.

The Fed is still obstructing bank functioning by demanding collateral from member banks when it lends. This is redundant and should be addressed at once.

Also, the Fed swap lines to foreign CB’s are again rising and approaching $700 billion. Not sure how this ends. Lines are scheduled to end in April, but hard to see this happening. It could turn out to be the largest international fiscal transfer of all time.


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Securitized Products Weekly Update: 12/22/08


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Securitized Products Weekly Update: 12/22/08

Overview

Securitized products continued to have a positive tone last week assisted by momentum from FOMC announcements. The RMBS sector benefited the most in hopes that aggressive downward pressure on mortgage rates will increase prepay speeds (thus enhancing yields in a deeply discounted market). CMBS shorter pays and junior AAAs firmed on the week along with more seasoned super dupers.

CMBS/X

  • CMBS cash continued to stabilize (from violent Nov swings) last week on lighter flows, with shorter pay A1-A3 supers and AM/AJ classes tightening the most and LCF’s (Last Cash Flow classes) firm but generally unchanged
  • LCF’s trading around +950 (~$70 price; 12% yield) although the market is becoming more bifurcated between deals considered to be safer and those perceived to have real credit risk; the trading range between the most/least desirable ’07 LCF’s is now in the 350bps range
  • Non-super AAAs seeing renewed buying interest; AMs were up another 5-6 pts week-over-week now trading in hi 40s
  • The market is taking increased note of relative value in shorter pay A1-A3 classes, as those classes tightened 50-75bps on the week
  • CMBX.AAA.4 tightened 77 bps on the week on relatively light flows and profit taking
  • The street reports spending increasing efforts to educate opportunity funds interested in CMBS; appx 25% have started buying and 75% still completing due diligence
  • Fitch reports that CRE loan delinquencies (held in CRE CDOs) declined from Oct to Nov from 3.1% to 2.8% as a result of increasing loan extensions being granted
  • Centro, distressed Australian retail REIT who levered up to buy U.S. shopping centers, averted bankruptcy by transferring 90% ownership control to lenders in exchange for loan extensions on maturing debt
  • GGP, a major U.S. mall REIT, was able to extend maturing secured loans in exchange for lender concessions
  • Both the Centro and GGP situations reflect lenders reluctance to foreclose/liquidate in this market and indicate that more extensions/modifications are likely for maturing CRE (commercial real estate) loans that cannot be refinanced
  • Market chatter about the Federal Reserve possibly buying CMBS directly in secondary markets continues to get some press
  • JPM liquidated a portfolio of CMBS securities on margin from Guggenheim, a levered CRE strategy fund and large TRS player
  • CMBS market tone improving and feels like it will be better bid after the turn, although the fact that new loan origination remains in a deep freeze is of concern

RMBS

  • RMBS continued to rally this week, Jumbo and Alt A super seniors were up 3-5 pts and Option ARMs were up 2 points
  • ABX 06 AAAs were up 2-4 pts and 07 AAAs were up 4-5 post FOMC moves and the government’s stated objective of driving down mortgage rates
  • Optimism in RMBS was sparked by hopes that lower mortgage rates will drive faster prepay speeds as the non-agency market presently prices to rock-bottom CPR assumptions
  • Both ML and JPM announced buy recommendations on non-agency AAA MBS based upon assessments that increasing traction from aggressive federal actions will accelerate the bottoming of the housing market and mitigate the risk of an over-correction on the downside
  • Affordability in a number of MSAs has now fully corrected to pre-bubble levels and lower mortgage rates will speed up the process across all markets
  • Although affordability metrics have improved and will further benefit from lower mortgage rates, rising unemployment will be a major headwind
  • Although mortgage modification efforts have yet to show results, the market senses a growing conviction on the part of the new administration to aggressively pursue mortgage modifications that will entail removing loans from securitized pools and encouraging principal reductions
  • JPM expects bottoming of house pricing to now occur in mid-09, escalating this timeframe from a prior expectation of 1H10
  • Citi is aggressively buying Option ARM super seniors and effectively setting market levels for this sector
  • Housing starts dropped to the lowest level in 50 years
  • JPM is advocating buying RMBS AAA Mezz trading in the $30s as it has the greatest convexity upside to increased mods/prepays
  • ML/Citi issued buy recommendations on super senior Option ARMs and certain Alt A AAA structures
  • Although most government actions have been initially directed towards improving conforming mortgage markets, non-agency RMBS is expected to become the beneficiary of 2009 actions expected to focus on foreclosure forbearance and more aggressive modification/principal writedowns

Credit Cards/Autos

  • Better tone to ABS market at higher-end of credit stack although flows were generally light and domestic Auto ABS continues to struggle
  • New Unfair or Deceptive Acts or Practices (“UDAP”) legislation passed will increase regulatory cost to card issuers but will have no significant adverse impact on profitability or trading levels
  • Some additional TALF details were announced including a term extension from one to three years; since TALF will only apply to newly issued ABS, it is likely to create a bifurcated market between TALF eligible and non-eligible ABS; TALF rate and haircut terms have yet to be announced
  • The BACCT (BofA) Credit Card Master Trust began trapping excess spread at the C class (BBB) level, prompting Card mezz classes to widen 50-75bps on the week
  • JPM significantly enhanced the WAMU Credit Card Master Trust by swapping out $6B of weaker accounts for stronger accounts
  • Although Nov results showed card charge-offs increased ~20bps to 6.7%, this was more than offset by margin improvement from declining Libor which boosted overall excess spread to 6.0%, up from 4.3% in Oct
  • Many synthetic CDOs invest note issuance proceeds in AAA credit card ABS due to cards historic ratings stability and available liquidity; liquidations of synthetic CDOs continues to adversely impact AAA card technicals as more AAA classes are forced back into the market
  • Auto ABS was buffeted by news highlighting rapid deterioration at GM and Chrysler and culminated with an announced bridge loan to get them over the turn
  • Independents and foreign issuer shelves continue to outperform domestic Auto ABS
  • Volkswagen was able to issue a new $1B ABS transaction last week; 1 year AAAs came at L+350

CDO/CLO

  • Little trading activity last week. BWIC with a AAA CRE CDO bond was talked in single digits (although didn’t trade) reflecting the rating agencies unwillingness to downgrade AAA CRE CDO paper. Market consensus on the bond was that there was little likelihood for any return of principal
  • Moody’s cautioned today that it will be reviewing their ratings on 109 CRE CDOs. AAAs may be downgraded 2-6 notches (4-8 notches on lower rated tranches). Moody’s expects to complete their review by Feb 09
  • JPM has been a large buyer of super senior AAA CLO paper the last few weeks. Huge OWICs over the last few weeks in 450a for high quality managers, which is about 100bps tighter than where BWICs had been trading. Current count has JPM adding $1.1BN to their $14BN AAA CLO exposure
  • A large wave of S&P downgrades on high yield loans last week threaten to trigger OC test failures in CLOs. Failure of OC tests results in cash flows being redirected from mezz class to senior note holders
  • S&P announced that they are reviewing the assumptions used to model CLOs and placed many mezz classes on negative watch over the last few weeks. BBB/BB classes are expected to be most impacted

Securitized Products

Name Approx $ Approx Yield Approx Spread Approx WoW Change WAL Description
CMBS
CMBS First/Current Pay low 90s 11% 900 -50 bps 1-3 Class currently being repaid; top of credit stack
CMBS Second Pay low 80s 14% 1250 -50 bps 1-4 Class next to pay down after 1st pay
CMBS Last Cash Flow (LCF) 70 12% 950 flat 7-9 Most liquid and largest AAA class
CMBS AM 45 18% 1950 + 5-7 pts 7-9 20% Credit Enhancement, AAA Mezz class
CMBS AJ low 30s 25% 2350 + 6-8 pts 7-9 Junior AAA, CE is 10-13 area
CMBS IO $0.5-$2.5 23-25% 2300 -100 bps 2-4 Credit levered interest only strip
CMBX4 07-2 AAA 523 -77 bps Consists of 25 mid-07 CMBS deals
CMBX4 07-2 AJ 1449 -181 bps Sub-index of junior AAAs
RMBS
RMBS Subprime First Pay 80s 15% 1300-1400 2 pts 1-3 Borrower FICO <685
RMBS Option ARM Super Senior ~42 16% 1300 3 pts 2-9 Alt A mortgages w/neg am options
RMBS Jumbo Pass Throughs ~69 4 pts 5-15 Prime borrowers w/loan size above conforming
ABX 07-2 LCF AAAs 32 1117 -34 Last cash flow subprime AAA
ABS
ABS Tier 1 Credit Cards (“AAA”) mid 90s 7% 525 flat 1-2 Shelves include JPM, CITI, BofA, and AMEXShelves include JPM, CITI, BofA, and AMEX
ABS Tier 2 Credit Cards (“AAA”) high 80s 8.25% 650 flat 1-2 Capital One, Discover, GE & private label retailers
ABS Tier 1 Cards (“A” Rated) low 80s 12% 1100 +50 bps 1-9 2nd loss mezz classes
ABS Tier 1 Cards (“BBB” Rated) low 80s 12% 1425 +75 bps 1-9 1st loss classes
ABS Prime Autos First Pay (“AAA”) mid 90s 7% 525 flat 1-2 Best shelves
ABS Prime Autos Second Pay (“AAA”) low 80s 7.50% 575 flat 2-3 Best shelves
CDO/CLO
CLO Super Senior 80s 7-9% 450-550 0 5.0-8.0 1st in CLO structure to be repaid
CLO Mezz (“BB” Rated) teens 65% 5700 0 3.0-9.0 Junior most bond in CLO structure, may “turbo”
CRE CDOs 40s/50s n/a 5.0-9.0 CDOs w/Whole Loans, Bnote/Mezz, CDO/CMBS


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Quantitative Easing for Dummies


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FACTBOX: What is quantitative easing?

Tue Dec 16, 2008 3:30pm EST

NEW YORK (Reuters) – The Federal Reserve on Tuesday cut its target for overnight interest rates to zero to 0.25 percent, bringing it closer to unconventional action to lift the economy out of a year-long recession.

“The message is they’re instituting quantitative easing on a fairly large scale,” said Doug Roberts, chief investment strategist at Channel Capital Research.com.

Under quantitative easing, central banks flood the banking system with masses of money to promote lending.

Central banks exchange non or low interest bearing assets- reserve balances- for longer term higher yielding securities.

Since lending is in no case ‘reserve constrained’, the ‘extra’ reserves do nothing for lending.

The purchase of the longer dated securities results in lower longer term rates than otherwise. The lower borrowing rates may or may not alter aggregate demand.

The lower rates for savers definitely lowers aggregate demand.

They usually do this when lowering official interest rates no longer is effective because they already are at or near zero.

True!

The central banks add cash by buying up large quantities of securities — government debt, mortgages, commercial loans, even stocks — from banks’ balance sheets,

Yes.

giving them plenty of new money to lend.

No, they already and always have infinite ‘money to lend’.

Available funds are not a constraint for the banking system.

The constraints are regulated asset quality and capital requirements that are expressed in the rates bank charge.

Not the total quantity of funds available.

It is a tool used by Japan earlier this decade to combat deflation and stimulate the economy.

Didn’t work then either. It was fiscal policy that kept them afloat, though not a large enough deficit to sustain output at full employment levels.


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What happened in July?


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Through Q2 08 GDP was muddling through with modestly positive numbers.

Then it hit the wall in July as crude oil and the commodities in general broke down courtesy of Mike Masters and Joe Lieberman.

Soon afterward the main street credit crunch intensified.

What I now suspect happened is that the US energy/commodity industry got the rug pulled out from under it as the transfer of nominal wealth from pension funds to passive commodity strategies to energy and commodity producers fell?

The straw that broke the camel’s back?

This sector had been holding up well with the higher prices, and energy producing regions had been doing reasonably well.

Domestically, the US produces about 8 million bpd of crude plus a lot of natural gas and other commodities that fell in price.

While the fall in prices benefited consumers, they were/are slow to react with more spending.


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Not ALL bad in Nonfarm Payroll report


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from Cesar at Valance:

  1. trend in construction job losses looking better- consistent with housing market getting to a point where drag on GDP will disappear. the prints since March are -39, -59, -38, -50, -20, and -8 in August
  2. Diffusion index jumped from 41.4 to 48.9 (less sectors with job losses)
  3. 37k of 101k job loss in private sector came from temp help

(Click to see more)


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2008-07-05 Valance Chart Review


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Twin themes remain – weakness and higher prices.

In Q2 2006 it seemed to me that the financial obligations ratio couldn’t get much higher which meant consumer debt could not grow at a faster pace.

With the budget deficit in decline and the trade gap still widening, it would have taken increasing rates of growth of consumer debt to sustain GDP, so my forecast was for gradually declining GDP growth rates over time.

At the same time, I was calling for ever higher crude prices as I saw the Saudis as a swing producer/price setter intent on hiking prices.

This was all temporarily derailed in Aug 2006 when Goldman changed the composition of its commodities index and liquidated substantial amounts of gasoline and crude from the basket of futures purchased and held by its fund, and another fund that followed the Goldman index also re-weighted funds and liquidated substantial numbers of futures contracts. This action pushed prices down until the liquidation was over, but then at year end Goldman and also AIG at year end changed their indexes and again drove prices down. Shortly thereafter it was announced that Goldman was turning its index over to S&P to avoid related party conflicts, or something like that, and the Saudis have resumed their clandestine price hiking.

In general, the Valance charts show economic weakening since Q2 2006. The subprime blow up took away demand in the housing sector as fewer buyers qualified for mortgages when the number of undetected fraudulent applications was reduced, with exports first picking up the slack in 07, and government kicking in soon after in 08.

With the government deficit now proactively growing again, and the financial obligations ratios starting to relax, GDP should continue to muddle through.

“Muddling through” also means, however, that demand will be high enough to support the current level of crude/food/import prices and allow core prices to catch up with headline CPI as the rising food/crude/import prices are also factors of production that are driving up costs.

So far, GDP has muddled through as domestic demand has weakened.

All the surveys look about like these – working their way lower over time, with some turning up recently from the lowest levels.

Government spending is on the rise, as a conspicuous drop in the rate of spending in 2007 is making a comeback in 2008, along with the fiscal package now kicking in.

Housing is way down, to the point where it could recover by 50% and still be depressed.

Rising affordability and the passage of time to digest the disruption of the subprime related issues along with increased government spending and increasing exports are beginning to turn things around from the bottom that may have been reached last October/November.

The outlook for the future may have bottomed at these very low levels.

Actual inventories of unsold new homes are steadily falling and median prices are showing signs of a bottom also pointing to a possible bottom for the housing sector.

Government spending and exports have kept the economy from getting a lot worse.

No matter how you look at it, the ‘labor markets’ are on the soft side.
Productivity increases have allowed positive GDP growth with reduced labor input.

Government to the rescue! GDP will be sustained as long as this holds up.

Not terrible here either, apart from the auto industry getting caught out with too many large trucks to sell.

Inflation will only get a lot worse as crude keeps rising.

NOTE: The dip from the Goldman effect in August 2006 has been largely reversed in CPI with the others following with a lag.

And these are the wholesale prices and import prices that have also more than recovered from the Goldman effect and are in the process of getting passed through to retail prices.

Export prices are booming, expectations way too high for the Fed, the CRB back on trend after the Goldman dip, and demand for Saudi crude holding firm at current prices.

All the price surveys look about like this.

Demand looks strong here as well.

Meanwhile wages remain ‘well-anchored’ as real wages go negative after being about flat for a few decades. And even the most liberal members of Congress seem to think this is a ‘good thing’ as they congratulate the Fed Chairman for keeping wage pressures low.

We are in the process of discovering it IS possible to have inflation without wages leading the way, just like the rest of the banana republics with weak currencies, rising import prices, export led growth, and declining real terms of trade.


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2008-05-24 Valance Weekly Chart Review

2008-05-24 Real GDP

Hard to see any recession here, and the consensus is for Q1 to be revised up to 0.9%, bringing year over year up to 2.8%.

I also think the estimates of the effects of the fiscal package are on the low side.

2008-05-24 Personal Spending, Personal Income

Income and spending continue to chug along, ahead of core but not headline ‘inflation’.

2008-05-24 Total Delinquency Rate, Residential Delinquency Rate, All Consumer Loan Delinquency Rate, Credit Card Delinquency Rate

Still moving higher.

2008-05-24 Fiscal Balance, Government Public Debt, Government Spending, Government Revenue

Fiscal rebates now kicking, with other government spending on the rise as well – should be a decent Q2 and better Q3.

And revenues seems to be holding up also indicating no recession yet.

2008-05-24 Export Prices, U. of Michigan 12 Month Inflation Expectations, CRB Index, Saudi Crude Production

2008-05-24 Philly Fed Prices Paid, Philly Prices Received

While headline CPI took a slight breather due to seasonal factors, the drivers of the current bout of inflation continue without let up, as crude oil touches $135 and the USD fall resumes.

Saudi crude output remains above 9 million bpd, indicating world demand is holding at the higher prices.

Booming exports and export prices work in tandem.

Inflation expectations have alarmed the FOMC with recent speeches indicating there will probably be no more rate cuts if inflation continues to escalate .

2008-05-24 U. of Michigan Confidence