From: vince farrell
Sent: Wednesday, February 20, 2008 8:54 AM
Sent: Wednesday, February 20, 2008 8:54 AM
Jan Hatzius, the head economic honcho at Goldman, had some dismal forecasts the other day. He figures that home prices are going to drop another 10% this year and that would mean 15 million mortgages, or 30% of total mortgages, would be on homes where the owner had "negative equity" in the house. Hope he's wrong. And I think he might be. The number of applications for refinancing of mortgages has tripled in the last four weeks which means that lower interest rates are starting to help. M2, a broad measurement of money in the system, is up $130 billion the last three weeks. This can be convoluted to explain, but accept that the Fed is pumping money into the economy and it seems to be welcomed. Let's see how this plays out.
I read in the paper the other day that BBB rated Collateralized Debt Obligations (CDO'S), which are collections of subprime mortgages, are 10 times more likely to default than BBB rated corporate bonds. Moody's Rating Agency says no, no. They are only 8 times more likely to default (Saturday's Wall Strret Journal.) What gives ? What are the alleged rating agencies up to ? Are they totally incompetent, corrupt, or what? How can you give something 8-10 times more likely to default the same rating ? Enraging !
With the back up of leveraged loans on bank balance sheets, financial M&A is not likely to come back anytime soon. Those heavy loans will have to be moved to clear the way for lending activity to resume. The only way to move them would be to sell at a loss, which estimates figure to be 5-7%. The banks can keep them and probably will get all the money back at maturity, but then they won't be able to make new loans.With $1.6 trillion in cash on corporate balance sheets, however, expect a lot more of Strategic M&A, like the Microsoft bid for Yahoo.
The Consumer Price Index was just released and it was "hotter" than expectations at +.4 on the headline and +.3 on the core, which excludes food and energy. Year over year the headline is +4.3% and the recent high was in 2005 at +4.7%. The core year over year was +2.5%, stronger than the 2% upper end of the Fed's target. Before we get overly excited, remember that inflation is a lagging indicator and before we start with doom-type forecasts of "stagflation", remember that the stagflation of the late 1970's and early 1980's had both inflation and unemployment in the double digits.The numbers released today along with oil near $100 will cause the market to sell off. I still think we need to test the January lows of arond 11,600 on the Dow vs. 13,400 now.
3 comments:
13,400 now? Wishful thinking!
They are 8 times more likely until the corporates start defaulting.
What it means is that humans as a species have very little ability to predict outcomes of complex events. A rating agency could have a meaning with regards to ratios, etc that were important in the past (data mining), but they are not likely to be good predictors in an absolute numerical sense: particularly when there is a crossover in catagories.
Complex outcomes are difficult, that is why one uses probability models to measure risk. I do not think that we have any precedent for measuring the default rates much less the percentage that real estate might fall.
I'm still of the mind that the Fed cannot print enough money to save us, and I do not agree with statements to the contrary. I understand that I do not know any more than they. It's just an opinion. Mine!
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