Hindsight may be 20-20 but Floyd Norris’s latest New York Times column leaves one wondering whether buyers of subprime “piggyback” home loans had any sight at all. Norris nominates a Merrill Lynch offering as candidate for the worst ever mortgage security. Piggyback loans cover the remaining 20% of a home’s purchase price after the original 80% mortgage, allowing the buyer to finance 100% of the purchase.
Would you invest money — at a very low interest rate — to finance mortgage loans made to risky borrowers who put no money down?
What’s interesting about the offering was that not only was it risky, but the yield was low, Norris notes.
“Although market interest rates were low when these mortgages were written, the mortgages had rates averaging 11.2 percent. Yet investors who put up most of the money were willing to accept a floating rate of just 30 basis points — three-tenths of one percentage point — over the London interbank offered rate. At the moment, that gives them a yield of 3.2 percent. ”
“Making the situation worse is the nature of many of the mortgages in the Merrill securitization,” Norris writes. “Fewer than 30 percent of the loans were made to borrowers who provided full documentation of their income and assets. Many of the other borrowers probably lied about their income. Nearly all had borrowed the full appraised value of the home, either for the purchase or for refinancing, and it is possible that some appraisals were unreasonably high even before home prices began to fall.”
Moody’s forecasts that by the time it is wrapped up, so many of the mortgages will have gone bad that 60 percent of the money lent will not be paid back.
Also worth a listen is This American Life’s podcast “The Giant Pool of Money” in which Alex Blumberg and NPR’s Adam Davidson teamed up to look at the mortgage meltdown from the inside out.
Junk bonds are in the spotlight this week with two separate but related posts topping the list of most read at Research Recap. Speculative grade bonds now account for half of all corporate bonds, leading Standard & Poor’s to predict that a
Glut of Junk Bonds Will Boost the Overall Bond Default Rate. Moody’s, meanwhile forecasts a Tripling of Junk Bond Defaults by Year-end.
With oil prices reaching record highs on an almost daily basis, it is no suprise that the IMF’s Speculation Playing “Significant Role” in Oil Price Surge was popular. You know this issue is getting serious when the Financial Times calls for a global oil summit.
Such a summit would have three objectives: to encourage energy efficiency, and so reduce future oil demand; to promote investment in new oil supplies; and to smooth the recycling of billions of dollars in oil revenues from producers back into consuming countries. All three tasks would be easier with international co-operation and there are enough shared interests to make a worthwhile deal possible.
Staying with energy, Freeedonia’ massive Industry Study World Biofuels Demand to Expand 20 percent Annually, drew interest, concluding that ethanol will dominate the industry for some time despite criticism that its is driving up food prices.
Research Recap Quote of the Week:
Maybe working longer is the best answer. After all, the retirement age was set at 65 in 1933, when average life expectancy was 63. With life expectancy today at 78 years, perhaps we should just plan to work until we’re 80.
S&P chief economist David Wyss’s proposed solution for Baby Boomer generation’s projected shortfall in retirement resources.
Oxford Analytica is not persuaded by the Bank of England’s recent suggestion that mark-to-market loss estimates overstate the damage wrought by the subprime crisis.
The BoE’s optimism contrasts with the IMF’s claim that total financial system losses — estimated at $945 billion dollars — remain in excess of writedowns announced so far by banks and other financial intermediaries.
In a new analysis BoE seeks light amid the gloom, OxAn says “it is debatable whether current pricing methods have led to excessively depressed ABS valuations. Mark-to-market pricing, or ‘fair value’ accounting, is strongly endorsed by the accounting profession.”
By arguing that current mark-to-market pricing is overstating financial losses, the Bank of England appears to be seeking to restore confidence in increasingly risk-averse markets, OxAn Says.
However, its contrarian views have called to question its credibility.
“The wide acceptance of ‘fair value’ accounting makes it unlikely to be dropped as common practice. Moreover, the (BoE’s) latest report fails to analyse sufficiently the market for ABCP or the risk of feedback — from a declining economy to the financial system — should present uncertainties be allowed to persist,” OxAn concludes.
Goldman Sachs is the big winner in the inaugural annual Financial Times/StarMine rankings of best equity analysts.
In each region, awards are presented to the top three stock pickers and earnings estimators in each industry, to the top 10 stock pickers and earnings estimators overall, and to the 10 brokerage firms that have won the most individual analyst awards. The Top Global Broker award goes to Goldman Sachs, which racked up the most individual analyst awards across the world.
As the credit squeeze has put investors’ nerves and portfolios under severe strain, research has experienced a resurgence in importance that looked unlikely after the Enron-era research scandals, the FT says. But the very conditions that have given research new-found prominence have also made the analyst’s job more difficult.
A striking feature of the StarMine results is that the US and European analysts who performed best in the changing markets of 2008 were less likely to be from “bulge-bracket” investment banks that have the most financial muscle.
In Europe, for example, six of the top 10 earnings forecasters and eight of the top 10 stock pickers came from independent regional firms, often covering medium and small cap companies.
Indeed, Europe’s top five stock pickers came from CA Cheuvreux, KBC Securities, Natixis Securities, Carnegie Investment Bank and Öhman Fondkommission.
Cheuvreux’s Philipp Bumm, rated Europe’s best stock picker, earned his status with bold calls on Q-Cells, the German solar panel company, and the renewable energy companies CropEnergies and Conergy.
The US displayed a similar pattern, with five of the top 10 stock pickers coming from outside the bulge bracket.
Analysts from firms such as the San Francisco-based boutique JMP Securities, Simmons & Company, an investment bank specialising in the energy sector, and Sterne, Agee & Leach, a century-old privately-held investment bank, outperformed colleagues from household names such as Credit Suisse, UBS and Morgan Stanley.
However, bulge bracket firms took seven of the top 10 spots in the overall US league table, which adds up all the awards won by each firm – a sign that size and breadth of coverage are still an important part of a bank’s research arsenal.
Big banks also dominated the overall table in Asia, a reflection of the fact that the region still lacks a robust breed of independent investment firms.
Nevertheless, Terry Smith, former head of UK research at UBS Phillips and Drew and chairman of Collins Stewart, the UK stockbroker, says the good showing by independent firms is evidence that the tighter conflict of interest rules that followed the Enron-era excesses have “neutered” bulge bracket firms.
“Their greater degree of compliance has cut them off from market intelligence. The bulge bracket also attracts more ‘me-too’ analysts who produce formulaic research,” he says. “[Independent firms] are just clearer about what analysts can do. It’s not that the people in smaller firms have lots of inside information. They are just less hidebound by what they can do.”.
For full details, see the FT’s special online report here, or a PDF of the FT’s print supplement here.
(via FT Alphaville.)
As if Yahoo CEO Jerry Yang didn’t have enough to worry about, Google (NASDAQ: GOOG) has now overtaken Yahoo (NYSE: YHOO) as the most-visited website property, according to comScore.
April saw Google Sites attain the number one spot in the Top 50 U.S. Properties ranking for the first time in its history with a total audience of more than 141 million visitors.
Yahoo Sites ranked second with 140.6 million visitors, followed by Microsoft Sites with 121.2 million visitors.
Superpages.com Network and CareerBuilder both jumped eight spots in the ranking to positions 18 and 30, respectively.
Content categories showing gains in April included job search, career resources, and television sites.
The top-gaining categories in April were Pharmacies and Retail-Food, both up 8 per cent from March.
According to comScore, Google’s unique U.S. audience in April was up 18 percent from the same month in 2007, while Yahoo’s audience grew 7 percent.
However, according to the Associated Press, Yahoo still leads in page views, meaning visitors spend more time there or return more often. Many Google users make a simple search request and quickly go elsewhere based on the results. Yahoo had 33.6 billion page views to Google’s 28.7 billion.
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The thinning ranks of climate change deniers are confronted with more compelling evidence in this week’s issue of Nature.
Nature reports that a comprehensive analysis of trends in tens of thousands of biological and physical systems has provided more evidence to bolster the near-universal view that man-made climate change is altering the behaviour of plants, animals, rivers and more.
The study, by an international research team featuring many members of the Intergovernmental Panel on Climate Change (IPCC), is a statistical analysis of observations of natural systems over time. The data, which stretch back to 1970, capture the behaviour of 829 physical phenomena, such as the timing of river runoff, and around 28,800 biological species.
Among the warming-linked changes seen in the study are the timing of plant flowering, bird nesting, ice melting, salmon migration and pollen release; declines in populations of polar bears, krill and penguins; and increased growth of Siberian pines and cool-water ocean plankton.
“This paper outlines an extremely robust case for linking a range of observed physical and biological changes to human-induced climate change, specifically warming,” says Roger Jones of the Centre for Australian Weather and Climate Research. “Unfortunately, the coverage of such data is not global and many regions of the world, including Australia, are not very well covered. Many of the regions that lack coverage are also thought to be highly vulnerable to the impacts of climate change.”
Early retirement by baby boomers could be helping keep the unemployment rate down even as payroll employment falls, according to Standard & Poor’s Chief Economist David Wyss.
In Older But Not Wiser: Why Americans Remain Dangerously Unprepared For Retirement, Wyss points out that as the oldest Baby Boomers turn 62, the sharp rise in the number of workers near the average retirement age will result in a group of workers with a less-than-normal need/desire to work. A jump in layoffs could convince many of these workers to retire early—either in response to buy-out offers or as a result of weak job prospects.
The result could be a drop in payroll employment with a less-than-expected rise in the unemployment rate. Labor statistics might not even count these workers as “discouraged” because they will report themselves as retired.
This could explain why in the last few months, we have seen such a sharp drop in the number of people employed, while unemployment claims have remained relatively low, Wyss writes.
Employers could be shedding workers into retirement rather than into unemployment.
The report outlines the challenges facing Baby Boomers as they near retirement:
The S&P 500 will have its worst decade since the Depression if it closes below 1,469 at the end of 2009. The decline in home prices is also eroding wealth.
Low interest rates mean low incomes for retirees. The 10-year Treasury note is yielding only 3.9%, up from the lows of a few weeks ago but well below its 6.9% average since 1960.
Retiring in a period like this strains assets in the best case—and this is far from the best case. Asset values have been declining, while saving rates have hovered near 0%. If older workers aren’t adding to their wealth and if their asset values are falling, the prospects of a comfortable retirement are receding. The average household had wealth equal to 558% of after-tax income at the end of 2007, down from 569% a year earlier and 618% at the market peak in 1999.
Wyss’s bottom line: “We’re in trouble. The average American is worried about retirement but is doing little to provide for it.”
Maybe working longer is the best answer. After all, the retirement age was set at 65 in 1933, when average life expectancy was 63. With life expectancy today at 78 years, perhaps we should just plan to work until we’re 80.
It looks like everything would have to go right for the US to meet President George Bush’s goal of meeting 20 percent of US energy needs through wind power by 2030.
A new study for the Department of Energy concludes that the goal is technically feasible, but also identifies the many challenges that need to be overcome. Put simply it would require a major national commitment by business and government and a change to business as usual.
The DOE report “20 Percent Wind Energy by 2030”, identifies requirements to achieve this goal including reducing the cost of wind technologies, new transmission infrastructure, and enhancing domestic manufacturing capability. The report identifies opportunities for 7.6 cumulative gigatons of CO2 to be avoided by 2030, saving 825 million metric tons in 2030 and every year thereafter if wind energy achieves 20 percent of the nation’s electricity mix.
The analysis concludes that reaching 20 percent wind energy will require enhanced transmission infrastructure, streamlined siting and permitting regimes, improved reliability and operability of wind systems, and increased U.S. wind manufacturing capacity.
There are significant costs, challenges, and impacts associated with the 20% Wind Scenario presented in this report.
“There are also substantial positive impacts from wind power,” the report says.…”expansion on the scale and pace described in this chapter are not likely to be realized in a business-as-usual future. Achieving this scenario would involve a major national commitment to clean, domestic energy sources with minimal emissions of GHGs and other environmental pollutants.”
Specific challenges include:
- Investment in the nation’s transmission system so the power generated is delivered to urban centers that need the increased supply;
- Larger electric load balancing areas, in tandem with better regional planning, so that regions can depend on a diversity of generation sources, including wind power;
- Continued reduction in wind capital cost and improvement in turbine performance through technology advancement and improved manufacturing capabilities; and
- Addressing potential concerns about local siting, wildlife, and environmental issues within the context of generating electricity.
Other highlights of the report include:
- Annual installations need to increase more than threefold. Achieving 20 percent wind will require the number of annual turbine installations to increase from approximately 2000 in 2006 to almost 7000 in 2017.
- Costs of integrating intermittent wind power into the grid are modest. 20 percent wind can be reliably integrated into the grid for less than 0.5 cents per kWh.
- No material constraints currently exist. Although demand for copper, fiberglass and other raw materials will increase, achieving 20 percent wind is not limited by the availability of raw materials.
- Transmission challenges need to be addressed. Issues related to siting and cost allocation of new transmission lines to access the Nation’s best wind resources will need to be resolved in order to achieve 20 percent wind.
The recent surge in oil prices cannot be explained by economic factors alone, meaning speculation has played a “significant role,” according to the International Monetary Fund.
In an analysis in its Regional Economic Outlook for the Middle East and Central Asia, the IMF says “The recent surge in the oil price (from $80 to over $100 a barrel) seems to go well beyond what would be indicated by the growth of the world economy.”
Producers in particular argue that fundamentals would yield an oil price of about $80 a barrel, with the rest being the result of speculative activity.
The IMF says one way to get a sense of speculative activity is to compare movements in the real price of oil with the real price of gold. This relationship has been surprisingly close for a long period of time. Gold is well known to be a highly speculative commodity, driven by factors other than derived demand, the IMF said.
“One could reasonably argue that this relationship, which has continued in 2008, is
evidence of speculative behavior in oil. If the oil price does fall significantly in the near term, it may reflect more the unwinding of speculative positions in both gold and oil than indicate that a recession is under way.”
“In summary, it appears that speculation has played a significant role in the run-up in oil prices as the U.S. dollar has weakened and investors have looked for a hedge in oil futures (and gold). ”
As financial market conditions settle down, fundamentals should take over and oil prices should come down further from the highs recently observed.
The rash of product recalls of imported goods last year is likely to result in higher production costs, but retailers may have a hard time passing those costs on to the consumer, a new survey from Deloitte indicates.
The reputation of goods produced in emerging markets had a rough ride in 2007. Not only have the various product recalls from China caused great media uproar, the rise in consumer concern over the environment has given a PR edge to companies focused on environmental sustainability. The 2008 issue of Deloitte’s annual Innovation in Emerging Markets study “explores how manufacturers from developed and developing countries view product safety, product quality and environmental standards in emerging markets and how they are managing their exposure to risk stemming from sourcing from these markets.”
The study starts by outlining some of the recalls that became media events. “It could be termed the year of the recall.”
From tainted toothpaste to contaminated dog food, 2007 saw scores of products recalled due to safety and quality issues.
The product recalls were mostly of goods produced by manufacturers in China. The Deloitte report give special attention to the developing attitude of Chinese executives. They find that, unsurprisingly, the recent events have emphasized the importance of product quality, safety and environmental concerns.
More than three-quarters of developed market executives thought it was very or somewhat likely their company would favor sourcing from markets with stricter standards and roughly two-thirds expected increased production in company-owned facilities.
Developed and developing country executives agreed that these actions undoubtedly mean higher operating costs. Interestingly, only about half of developed market executives thought they would be able to charge higher prices by adhering to higher
standards. In contrast more than two-thirds of developing market executives believed that companies meeting strict standards could command higher prices.
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