Go figure... the Treasury buys Treasuries (driving prices up and yields down, for those of you who are playing the at home game) and the professional money managers move to buying Corporates and Mortgage-backs.
What's the phrase I'm thinking of? Oh yeah... "Come to mama!!"
Monday, March 30, 2009
Tuesday, March 24, 2009
::thwap:: ::thwap:: ::thwap:: ::thwap:: ::thwap::
You might have heard that President Obama is getting a brand-spanking new helicopter That noise overhead? That's just the sound of Helicopter Ben Bernanke doing a test flight while dropping a couple trillion dollars over the landscape.
Bernanke said Friday that the purchases of Treasuries and mortgage securities were meant to address the widening credit spreads. Honestly, that doesn't hold much water with me. As a client rightly pointed out, the Fed is out of their normal arsenal of bullets and is having to bring in other artillery to try to kill the beast. Through the purchase of these securities, they drive the prices up, the yields down - a good move for the mortgage securities, but not really a big deal on the Treasuries. Thirty year Treasuries are trading at a yield of 3.66%, not exactly a problem. On the other hand, the spread between Corporates (high quality and high yield) and the Treasuries is just out of hand. As of 3/31/06, the spread between the 9 year Treasury and the AAA Corporates was 1%, between Treasuries and High Yield Corporates it was 3%. Today, three years and a little credit crisis later, it's 3.5% for Treasury/AAA and 12% for the Treasury/High Yield spread.
I have to believe that part of what they're trying to do is buy in the Treasuries so money managers will migrate those $$ to bonds with more credit risk. However, it puts a lot of currency into circulation really fast. All the stimulus prior to this led me to believe that if we were going to have inflation we'd see it sometime in late 2010 (if at all), given that so much of the money being thrown at the crisis would be used by consumers to pay down their amazingly high debt loads. This new addition has me certain that there's no way that this won't be inflationary at some point, and that point has moved significantly closer - best guess now is early 2010.
I'd suggest that sometime between now and when that inflation hits going to gold might not be a bad idea. Other hard commodities should also do well in that type of environment. The trick, however, is that between now and whenever the inflation hits, I expect a continuation of the deflationary trend we're currently seeing.
In light of the Treasury's announcement Monday, there's obviously another layer of complexity to things, although not much more clarity. The announcement on Monday of a public-private partnership to help clear the toxic waste off of the banks' balance sheets has some good points and some bad points. Essentially, five yet-to-be-named private firms will be approved to bid on "assets" that banks want to sell. The private firm who bids the most for the asset will have to put up a small amount (roughly 7%), the Fed will put up an equal amount and the FDIC will guarantee up to 78%. If the asset goes up in value, the private firm and the government split the profit. If the asset goes down in value from whatever the purchase price is the private firm and the Fed can lose their entire investment and the FDIC steps in to absorb any further losses.
While this will help set some sort of a market price for the toxic assets, the private firms have very little skin in the game and obviously the potential for pretty impressive returns. On the other hand, it uses the expertise of the private firms to set appropriate prices and keeps the government from overpaying (too much anyway) for the assets and they won't be 100% responsible.
Monday's market rally was in my mind more of a "oh, thank goodness they finally at least came up with SOMETHING!" rally rather than specific expectation that this plan will be the saving grace for the economy. I still expect that the significant systemic problems in the economy will take time to unwind themselves. While I know that I'm going against some pretty impressive market experts on this, I don't believe that this is the beginning of the next bull market - I'm firmly in the bear market rally camp. Valuations are still too high. Just because the banks will be more able to lend after the toxic waste is off their balance sheets doesn't mean that a) they will lend or b) that the American consumer really should take them up on any loans offered. The over consumption by American consumers has led to personal balance sheets bloated by debt and lacking in savings. Add to that a 45% reduction in the value of their retirement accounts and at least a 20% reduction in the value of their homes, and I don't see how this economy that is 70% fueled by the consumer can bounce back in a healthy way in the short term. The stock market may bounce... but the underlying economy has more pain to come.
Bernanke said Friday that the purchases of Treasuries and mortgage securities were meant to address the widening credit spreads. Honestly, that doesn't hold much water with me. As a client rightly pointed out, the Fed is out of their normal arsenal of bullets and is having to bring in other artillery to try to kill the beast. Through the purchase of these securities, they drive the prices up, the yields down - a good move for the mortgage securities, but not really a big deal on the Treasuries. Thirty year Treasuries are trading at a yield of 3.66%, not exactly a problem. On the other hand, the spread between Corporates (high quality and high yield) and the Treasuries is just out of hand. As of 3/31/06, the spread between the 9 year Treasury and the AAA Corporates was 1%, between Treasuries and High Yield Corporates it was 3%. Today, three years and a little credit crisis later, it's 3.5% for Treasury/AAA and 12% for the Treasury/High Yield spread.
I have to believe that part of what they're trying to do is buy in the Treasuries so money managers will migrate those $$ to bonds with more credit risk. However, it puts a lot of currency into circulation really fast. All the stimulus prior to this led me to believe that if we were going to have inflation we'd see it sometime in late 2010 (if at all), given that so much of the money being thrown at the crisis would be used by consumers to pay down their amazingly high debt loads. This new addition has me certain that there's no way that this won't be inflationary at some point, and that point has moved significantly closer - best guess now is early 2010.
I'd suggest that sometime between now and when that inflation hits going to gold might not be a bad idea. Other hard commodities should also do well in that type of environment. The trick, however, is that between now and whenever the inflation hits, I expect a continuation of the deflationary trend we're currently seeing.
In light of the Treasury's announcement Monday, there's obviously another layer of complexity to things, although not much more clarity. The announcement on Monday of a public-private partnership to help clear the toxic waste off of the banks' balance sheets has some good points and some bad points. Essentially, five yet-to-be-named private firms will be approved to bid on "assets" that banks want to sell. The private firm who bids the most for the asset will have to put up a small amount (roughly 7%), the Fed will put up an equal amount and the FDIC will guarantee up to 78%. If the asset goes up in value, the private firm and the government split the profit. If the asset goes down in value from whatever the purchase price is the private firm and the Fed can lose their entire investment and the FDIC steps in to absorb any further losses.
While this will help set some sort of a market price for the toxic assets, the private firms have very little skin in the game and obviously the potential for pretty impressive returns. On the other hand, it uses the expertise of the private firms to set appropriate prices and keeps the government from overpaying (too much anyway) for the assets and they won't be 100% responsible.
Monday's market rally was in my mind more of a "oh, thank goodness they finally at least came up with SOMETHING!" rally rather than specific expectation that this plan will be the saving grace for the economy. I still expect that the significant systemic problems in the economy will take time to unwind themselves. While I know that I'm going against some pretty impressive market experts on this, I don't believe that this is the beginning of the next bull market - I'm firmly in the bear market rally camp. Valuations are still too high. Just because the banks will be more able to lend after the toxic waste is off their balance sheets doesn't mean that a) they will lend or b) that the American consumer really should take them up on any loans offered. The over consumption by American consumers has led to personal balance sheets bloated by debt and lacking in savings. Add to that a 45% reduction in the value of their retirement accounts and at least a 20% reduction in the value of their homes, and I don't see how this economy that is 70% fueled by the consumer can bounce back in a healthy way in the short term. The stock market may bounce... but the underlying economy has more pain to come.
Friday, March 20, 2009
A squeeze around the middle
Sometimes a squeeze around the middle is a nice thing. I personally like it when my husband or kids come up and give me a hug. But when the squeeze is put on me in a business sense, not so much.
One of my loyal readers asked in the comments of another post how credit terms had changed for some of the retailers recently. Interesting question, and one that I have spent some time working on recently. In the interest of full disclosure, I'm discussing this from an outside perspective. I've not worked in the credit area of a supplier or in the buying organization for a retailer... but I know people who have and/or do.
Under normal times retailers (we're talking big retailers here, not the mom & pops) order goods from a supplier. The supplier produces the goods and when they ship they bill. Terms differ, but are usually net 30, net 45, something like that. The retailers usually negotiate additional other terms they want such as markdown allowances, etc.
From what I'm hearing on multiple fronts, the retailers are getting more than a little bit bolder on the terms that they're demanding. They're not only asking for higher allowances, but they're also extending out their payments. In fact, numerous retailers are actually highlighting their accounts payable as a percentage of inventories on their earnings calls. Additionally, for goods shipped from overseas historically the retailer was said to have possession of the goods when they shipped, so the time on the ocean counted in the payment terms. That just got changed by a number of large retailers recently.
Suppliers have a few ways to fight back. Some retailers are obviously cash strapped, and that's taken into account by the credit managers at the suppliers when orders are placed. I'm hearing that credit terms are especially strict these days. Credit managers are pouring through financials, trying to make sure that they're not taking on too much risk. As one friend put it, "Just because you're a big company doesn't mean you can't go bankrupt on me." I know of one particularly fiesty credit manager who refused to sell to a certain large retailer because they were asking for ridiculous terms. The line "you have to sell to us because we're _______" doesn't hold much weight right now. Also, JP Morgan (and others, I'm sure) have developed some financial hedging products to allow suppliers to protect themselves against the potential bankruptcy of retailers with whom they do business.
Cheery, no?
One of my loyal readers asked in the comments of another post how credit terms had changed for some of the retailers recently. Interesting question, and one that I have spent some time working on recently. In the interest of full disclosure, I'm discussing this from an outside perspective. I've not worked in the credit area of a supplier or in the buying organization for a retailer... but I know people who have and/or do.
Under normal times retailers (we're talking big retailers here, not the mom & pops) order goods from a supplier. The supplier produces the goods and when they ship they bill. Terms differ, but are usually net 30, net 45, something like that. The retailers usually negotiate additional other terms they want such as markdown allowances, etc.
From what I'm hearing on multiple fronts, the retailers are getting more than a little bit bolder on the terms that they're demanding. They're not only asking for higher allowances, but they're also extending out their payments. In fact, numerous retailers are actually highlighting their accounts payable as a percentage of inventories on their earnings calls. Additionally, for goods shipped from overseas historically the retailer was said to have possession of the goods when they shipped, so the time on the ocean counted in the payment terms. That just got changed by a number of large retailers recently.
Suppliers have a few ways to fight back. Some retailers are obviously cash strapped, and that's taken into account by the credit managers at the suppliers when orders are placed. I'm hearing that credit terms are especially strict these days. Credit managers are pouring through financials, trying to make sure that they're not taking on too much risk. As one friend put it, "Just because you're a big company doesn't mean you can't go bankrupt on me." I know of one particularly fiesty credit manager who refused to sell to a certain large retailer because they were asking for ridiculous terms. The line "you have to sell to us because we're _______" doesn't hold much weight right now. Also, JP Morgan (and others, I'm sure) have developed some financial hedging products to allow suppliers to protect themselves against the potential bankruptcy of retailers with whom they do business.
Cheery, no?
Thursday, March 19, 2009
Ironic: rhymes with moronic
I'm not a political person. I really just don't have any interest in the whole realm, generally speaking. But that doesn't stop me from appreciating good irony.
The furor over the AIG bonuses has been all over the news of late. The whole thing goes beyond stupid into realms of idiocy.
The argument that AIG was contractually obligated to pay the bonuses? Bogus.
The exaggerated attempts by politicians all over the Eastern seaboard who actually put specific language into legislation that approved the bonuses to look innocent of any misdeeds? Bogus.
The administration's posturing regarding the bonuses when they obviously had a responsibility to be watching over this kind of stuff? Bogus.
The article published by Bloomberg yesterday that shows that Freddie Mac and Fannie Mae, currently run by the US government, have retention bonuses in place not unlike those being decried at AIG? Priceless.
The furor over the AIG bonuses has been all over the news of late. The whole thing goes beyond stupid into realms of idiocy.
The argument that AIG was contractually obligated to pay the bonuses? Bogus.
The exaggerated attempts by politicians all over the Eastern seaboard who actually put specific language into legislation that approved the bonuses to look innocent of any misdeeds? Bogus.
The administration's posturing regarding the bonuses when they obviously had a responsibility to be watching over this kind of stuff? Bogus.
The article published by Bloomberg yesterday that shows that Freddie Mac and Fannie Mae, currently run by the US government, have retention bonuses in place not unlike those being decried at AIG? Priceless.
One foot on the banana peel
Oh dear, here we go again. More announced store closings, and the prospect of others.
Ritz Cameras, currently in bankruptcy proceedings, got permission today to liquidate their 129 Boater's World stores. They will also be closing roughly half of their 800 camera stores. The small (5 stores) shopping center right across the street from my office has a Boater's World. The owner of the center just had to replace Computer City with a PetSmart. Now the space next to PetSmart will soon be open. The pain for commercial real estate is starting to get real.
Also, Eddie Bauer just announced that things aren't looking so good in their neck of the woods (all puns intended). They've apparently agreed to new terms on their debt, and those terms rarely come with an interest rate reduction. The CEO says it gives them more flexibility regarding loan covenants through first quarter of 2010. I hope that's long enough. The market apparently isn't sure either - the stock was down a mere 48% today.
Are we having fun yet?
Ritz Cameras, currently in bankruptcy proceedings, got permission today to liquidate their 129 Boater's World stores. They will also be closing roughly half of their 800 camera stores. The small (5 stores) shopping center right across the street from my office has a Boater's World. The owner of the center just had to replace Computer City with a PetSmart. Now the space next to PetSmart will soon be open. The pain for commercial real estate is starting to get real.
Also, Eddie Bauer just announced that things aren't looking so good in their neck of the woods (all puns intended). They've apparently agreed to new terms on their debt, and those terms rarely come with an interest rate reduction. The CEO says it gives them more flexibility regarding loan covenants through first quarter of 2010. I hope that's long enough. The market apparently isn't sure either - the stock was down a mere 48% today.
Are we having fun yet?
Wednesday, March 18, 2009
AHA!
As you might remember, I was confounded by the retail sales numbers last week. The number was higher than I expected, especially for apparel which was +2.8% from January.
Today the clouds parted and all became clear. Turns out the culprit was inflation. The apparel component in the consumer price index was up 1.3% for the month of February. I'm not 100% sure WHERE the prices were up, since it sure seems like apparel prices where I'm looking are falling... or at least discounted by huge amounts.
Today the clouds parted and all became clear. Turns out the culprit was inflation. The apparel component in the consumer price index was up 1.3% for the month of February. I'm not 100% sure WHERE the prices were up, since it sure seems like apparel prices where I'm looking are falling... or at least discounted by huge amounts.
Friday, March 13, 2009
Factoids and cheerleading
In the midst of preparing a talk for a recession workshop next Tuesday morning, I came across an updated factoid that made my stomach turn. Never one to keep pain to myself, I had to share with all y'all.
My friends at the Mortgage Bankers Association (okay, they're not really friends, especially lately, but I'm trying to be nice here) track seriously delinquent loans as a percentage of total loans outstanding. Even through early 2007 the percentage was right around 2%. Unfortunately, then it decided that it wasn't afraid of heights. The number as of the end of the year (it's a delayed but quarterly release) is... sit down... 6.3%.
I could say more, but do I really have to? Okay, if you insist. Can I remind you of this graph that shows how many ugly loans still have to be worked through over the next year or two? Okay. Now I'm done with that.
I was never a cheerleader in school. It just wasn't me. At all. (Those of you who knew me will say "duh.") So I still have a problem with excessive enthusiasm, especially when it's totally misplaced ... and I don't care if it's a bad football team or an even worse economy. So you can imagine my joy as I watch the rah-rah antics of the current administration.
Larry Summers was quoted today saying "It is modestly encouraging that since it began to take shape, consumer spending in the United States, which was collapsing during the holiday season, appears, according to a number of indicators, to have stabilized." Ummm, dude, it didn't fall as much as expected, but it did fall. And the consumer is so far in debt that they shouldn't be spending at all!
President Obama was waving his pom-poms today too. "If we are keeping focused on all of the fundamentally sound aspects of our economy, all the outstanding companies, workers, all of the innovation and dynamism in this economy then we're going to get through this. I'm very confident about that."
And if I hear one more talking head blather about how wonderful it is for the market that Uncle Ben is going to be on 60 Minutes this Sunday, I'm going to burn somebody's pom-poms in protest.
It all kind of reminds me of this quote:
"I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States—that is, prosperity."
Who said that last bit of verbosity?
Oh, that was just Herbert Hoover in May of 1930.
My friends at the Mortgage Bankers Association (okay, they're not really friends, especially lately, but I'm trying to be nice here) track seriously delinquent loans as a percentage of total loans outstanding. Even through early 2007 the percentage was right around 2%. Unfortunately, then it decided that it wasn't afraid of heights. The number as of the end of the year (it's a delayed but quarterly release) is... sit down... 6.3%.
I could say more, but do I really have to? Okay, if you insist. Can I remind you of this graph that shows how many ugly loans still have to be worked through over the next year or two? Okay. Now I'm done with that.
I was never a cheerleader in school. It just wasn't me. At all. (Those of you who knew me will say "duh.") So I still have a problem with excessive enthusiasm, especially when it's totally misplaced ... and I don't care if it's a bad football team or an even worse economy. So you can imagine my joy as I watch the rah-rah antics of the current administration.
Larry Summers was quoted today saying "It is modestly encouraging that since it began to take shape, consumer spending in the United States, which was collapsing during the holiday season, appears, according to a number of indicators, to have stabilized." Ummm, dude, it didn't fall as much as expected, but it did fall. And the consumer is so far in debt that they shouldn't be spending at all!
President Obama was waving his pom-poms today too. "If we are keeping focused on all of the fundamentally sound aspects of our economy, all the outstanding companies, workers, all of the innovation and dynamism in this economy then we're going to get through this. I'm very confident about that."
And if I hear one more talking head blather about how wonderful it is for the market that Uncle Ben is going to be on 60 Minutes this Sunday, I'm going to burn somebody's pom-poms in protest.
It all kind of reminds me of this quote:
"I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States—that is, prosperity."
Who said that last bit of verbosity?
Oh, that was just Herbert Hoover in May of 1930.
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