Moody’s explains why it thinks mortgage foreclosures will continue to rise despite loan modification efforts.
In Moody’s ResiLandscape newsletter, Celia Chen of Moody’s economy.com notes that the cost of owning over renting is particularly steep for those who took out loans in 2005 through 2007, the group most likely to be under water. “The enticement to walk away from a mortgage will contribute to the expected rise in foreclosures.”
“While the cost differential between owning a home and renting, on average, has narrowed since the top of the housing market, owning a home is still slightly more costly than renting. For those borrowers who are currently at risk of defaulting, however, the cost of owning may well exceed the rental cost. Those who took out loans in 2005 through 2007 are likely to be the most under water on their mortgage, yet are saddled with the highest monthly mortgage payments. The prospect of a cheap rental makes it all the easier for such distressed, underwater homeowners to decide to walk away from their mortgages. This dynamic will contribute to the rise in foreclosures that we’re expecting.”
The cost of owning compared to renting has come down significantly from the top of the housing boom, but still remains slightly above the norm as compared to the long run average of this ratio (see chart above). However, slow rent growth and a slight uptick in house prices have kept this ratio from falling in the past several quarters. Not only is the recession constraining overall demand for housing and placing downward pressure on rent growth, but many frustrated home sellers are renting out their homes, adding to the supply of rental units.
About 32% of all homeowners with a first mortgage were under water in the third quarter of last year. Many of these homeowners will choose between defaulting and struggling to pay off a loan for a home whose value may be years away from exceeding the value of the mortgage. Some of these borrowers will be able to cut their living costs nearly in half by becoming renters, making it easier to walk away from their homes and default on their loans.
The inducement is another reason we expect foreclosures to mount and efforts to modify distressed mortgages to disappoint until partial principal forgiveness becomes a reality.
Mounting foreclosures will further depress house prices, sending the price-to-rent ratio down to its long-run average by year end.
Technorati Tags: foreclosures, mortgage defaults, mortgages
Guest Post by Philip H. de Leon of OilPrice.com.
Gazprom faces regular opprobrium for its bullying ways of using energy as a pressure and political tool. Seen by some, mostly Russians, as the symbol of a successful and strong Russia, others see it as a dominating juggernaut, economic right arm of the Kremlin implementing, or should we say, imposing its policies by using energy as a weapon.
Just like Louis XIV used to say “L’Etat c’est moi” (I am the State), Gazprom could say the same in light of its commercial power and the unconditional governmental backing it enjoys. However, just like Monsanto generates passionate debates with its genetically engineered seeds, Gazprom’s activities cannot be simply labeled as right or wrong and subject to final judgments.
Though far from being an angel, Gazprom is not necessarily a demon either. It is easy to point fingers and to forget that oil & gas is a merciless sector where every major is trying to position itself for the next 20 to 30 years and secure predictable supply and demand at home and abroad. After all, large Western energy companies were not born nice and proper. It took decades for codes of conduct, tacit or written, to be adopted and enforced. It is also easy to forget that all energy companies have in mind the interests of the country they come from.
Why would it be any different for Gazprom? And why should Gazprom take upon itself to act differently if it can get away with what it does and not be sanctioned by its own government?
The main issue with Gazprom could be summarized by using the famous quote of U.S. Secretary of Defense Donald Rumsfeld who said about Iraq “there are known unknowns. That is to say, there are things that we now know we don’t know. But there are also unknown unknowns. These are things we do not know we don’t know.” Because of all the things we do not know about Gazprom, sensitivity to what Gazprom does is greater because ultimately what it decides to do today and how it does it will impact energy supplies for years to come and how the game is played.
The lack of information on the personal relationships between the business and political world, on its exact ownership structure, on the exact identity and role of business intermediaries, on the flow of money through a labyrinthine network of offshore and shell companies, and on the overall exact modus operandi of Gazprom is what leads Gazprom to be subject to greater scrutiny and interrogations. It efforts to maintain an export monopoly for gas flowing to Europe and Asia at a huge cost, possibly over-committing dwindling resources at a time of lower energy prices and lower needs from consumers is another concern as would happen if Gazprom was to fail?
Gazprom: The Lord of the Rings
Gazprom is a behemoth: it is Russia’s largest company, state-controlled and the world’s largest gas producer. Engaged in gas exploration, processing, and transportation, it operates an extensive pipeline network stretching thousands of kilometers across Central Asia and Europe. Gazprom ranks #22 in the 2009 annual ranking of the world largest corporations published by Fortune magazine and has 456,000 employees. With close ties to the Kremlin – President Dmitry Medvedev used to be chairman of Gazprom’s board of directors – and accounting for about 25% of Russia’s federal tax revenues according to pre-crisis data, Gazprom has a unique leverage and has no qualm about flexing its muscles.
Gazprom has an uncanny ability to do things that are morally reprehensible by Western standards and to be oblivious to the critics that ensue. Image building and public relations are concepts that have not sunk in, even more so as Russians have the deep belief to be justified in their actions, be it with its dealings with Chechnya or Georgia, or when cutting gas to Europe in January 2009. Russians also like to push situations to the limits, just like driving without seatbelts and passing cars with incoming traffic on an icy road.
Gazprom and Ukraine: who’s bad?
Russians are full of contradictions, and so is Gazprom. One can only be amused to read its mission statement extracted from its Gazprom in Figures 2004 -2008 and 2008 Annual Report that state: “OAO Gazprom mission is to ensure an efficient and balanced gas supply to consumers in the Russian Federation and fulfill its long-term contracts on gas export at a high level of reliability.” That did not prevent Gazprom from bluntly cutting the gas supply to Ukraine in January 2009 over non-payment issues and quantities to be supplied, impacting 18 European countries in the mix in the midst of a cold winter.
The image of Russia as a reliable partner has been severely damaged, even more so as this was not the first time gas supply to Ukraine was cut like in January 2006. Even the Soviet Union did not tamper with gas supply, knowing how important the energy cash machine was to its economy and survival. Those cuts prompted (i) end-user countries to find alternative suppliers and (ii) producing countries that rely on the Gazprom pipeline network, to find alternative export routes for their existing clients, in addition to finding new clients.
In this context, the Nabucco Pipeline that bypasses Russia gains momentum while Turkmenistan can sigh with relief with the new Central Asia – China Gas Pipeline inaugurated in December 2009 that takes gas from the Caspian Sea via Uzbekistan and Kazakhstan to China.
Russia makes no efforts to work on its international public image but Russia and Gazprom would have benefited from elaborating over the payment mechanisms in place with Ukraine. For many years, Ukraine has enjoyed discounted prices, significantly below world market prices. It also has resisted price adjustments sought by Russia. Those sweet deals have been detrimental to Ukraine and to the competitiveness of its industry. According to the European Bank for Reconstruction and Development (EBRD) “Ukraine is one of the most energy-intensive countries in the world and is only one-third as energy efficient as the average European country.”
The following facts would have been good to communicate to show that Russia and Gazprom were sensitive to the challenges that gas price increases represent for Ukraine, both economically and socially. At the end of 2008, Ukraine was enjoying heavily discounted prices and resisted Gazprom’s price adjustment efforts, despite a very preferential rate being offered. Gazprom went as far as to lower its price offer from $418 to $250 for 1,000 cubic meters. When the Ukrainians made a counteroffer of $235, Gazprom reverted to if initial offer of $418. The lack of agreement over pricing by December 31, 2008 led to the January crisis. After the crisis, Ukraine still paid 20% less then European prices. Starting in January 1, 2010, a 10-year contract stipulates that Ukraine will switch to market prices.
Needless to say that the door was swung right back at Gazprom by the countries through which Gazprom’s gas transit. For instance, Ukraine raised transit fees by almost 60% from $1.70 per 1,000 cubic meters per 100 kilometers of transit to $2.70 in 2010. On top of this, Gazprom accuses countries like Belarus and Ukraine to “siphon” gas out of its pipelines, in other words to take gas out of the pipelines without having agreed to pay higher prices.
Russia would also have benefited from addressing the issue of the intermediaries involved in gas transactions such as RosUkrEnergo which according to its website “plays the role of a mediator of interests between Russia and Ukraine with regard to collaboration in natural gas issues. On the one hand, it acts as guarantor for natural gas deliveries to Ukraine at prices that are tolerable for the economy of that country and, on the other hand, RosUkrEnergo is financial guarantor for Gazprom, to which it makes the appropriate payments for natural gas supplied to Ukraine.” That mediation role, notably in paying Gazprom for gas going to Ukraine is where sand got into the mechanism as the money transfer seems to not have proceeded properly and in a timely manner, resulting in the January 2009 conflict. Middlemen need to be cut out of energy transactions and interestingly this was already agreed between Prime Minister Yulia Tymoshenko of Ukraine and Vladimir Putin in 2008.
Living dangerously but too big to fail?
In 2008 the company reportedly ended 2008 with about $50 billion in debt and its net profits fell by almost 50% in the first two quarters of 2009. With aging fields and equipment, ambitious development plans, numerous procurement contracts signed, 2010 will be the year of many challenges for Gazprom and anyone dealing with Gazprom, countries or companies.
Multiple issues should be kept on the radar screen:
- What is the financial situation of Gazprom? One may think that since an international auditing firm, namely PricewaterhouseCoopers (PwC), is the auditor of Gazprom, the books should be in order. That’s possible but one should not forget that PwC has recently been involved in multiple high profile scandals with over $1bn involved in each case. The question is then: how much credit can we give to PwC’s audits? These scandals involve the Satyam case in India, where a large IT outsourcing company cooked the books saying it had $1 billion when it fact it was lest than $78 million, and the Bernard Madoff Ponzi scheme as PwC was the auditor of Fairfield Sentry, one of the feeder funds that channeled $7.2 billion to Mr. Madoff which disappeared in the debacle.
- Economically sound deals? Gazprom agreed in December 2009 to buy up to 30 billion cubic meters (bcm) of gas a year from Turkmenistan. At a time where many wonder if there will be enough gas to fill the Western-endorsed Nabucco pipeline, such a large deal can be seen as an attempt to short circuit and challenge the viability of the Nabucco pipeline. Nabucco, a project supported by the United States and many European countries, is in direct competition with the Russian-endorsed South Stream pipeline and there are concerns that there may not be enough gas to supply both pipelines. Nabucco would ultimately have a capacity of 31 bcm per year and South Stream of 63 bcm/y. The South Stream website though uses sibylline statements saying that “If both South Stream and Nabucco are to be implemented, the South Stream consortium will closely cooperate with Nabucco in order to optimize gas flows and guarantee reliable supplies.”
- The underlying question is what will Gazprom do with all this Turkmen gas at a time of diminishing demand from Europe, including Ukraine where a large proportion of Turkmen gas transited or ended. Payment issues are an additional headache and Alexey Miller, Chairman of the Management Committee of Gazprom even assessed in December 2009, “the situation with [Ukraine's] payment for Russian gas supplies in December as very alarming.”
- An evolving world: Gazprom and Russia may see the table turned on them. Despite repeated statements of its desire to be a reliable partner, the 2006 and 2009 events with Ukraine have forced dependent countries to find alternative gas providers and transit routes. For a while Gazprom may have thought its use of Liquified Natural Gas (LNG) would have enabled it to regain the upper hand by opening up new export markets and routes but many countries have significant experience in that technology such as Qatar, Algeria and Libya, while more countries are coming to the market such as Australia and Egypt. Furthermore, in 2009 the United States overtook Russia as the world’s largest producer of natural gas. This is concerning for Gazprom as it confirms a growing trend pushing for energy independence, vocally defended in the United States by U.S. billionaire T. Boone Pickens in his “Pickens Plan” that advocates for the use of renewable energy and American natural gas in addition to energy savings.
What is in the pipeline for 2010?
According to the U.S. Energy Information Agency, Gazprom was planning in 2008 to invest around $45 billion in 2010 just to maintain production at its top four gas producing fields has been declining. With a GDP contraction in Russia of nearly 9% in 2009, tumbling energy prices, lower international demand, and stricter borrowing requirements, 2010 will not necessarily be as ambitious as originally planned. This said, the year started well with the resumption of the gas flow from Turkmenistan after an eight-month hiatus.
For Alexey Miller, and as stated in his column “the beginning of 2010 was marked with a very important event – Gazprom has started up natural gas procurement from Azerbaijan for the first time ever. (…) Objectively, Gazprom offered the most competitive conditions of gas purchase from Azerbaijan since we had everything needed for that purpose: the common borders and the gas transmission infrastructure under operation.” All this comes as a result of intense efforts from Gazprom’s top executives that travelled the world in 2009, oftentimes with high-level Russian governmental delegations, to meet with world leaders to negotiate lucrative agreements.
Russia is often referred as the “Wild East” in a reference similar to the U.S. “Wild West” when people and companies operated in a semi-lawless environment. Russia has laws but its judiciary remains weak and corruption is deeply ingrained. The lack of accountability in Russia that permeates through the society enabling anyone to do as they please goes on par with the dismissive attitude towards the rule of law, which President Dmitry Medvedev calls “legal nihilism,” namely Russians’ tendency to disregard the law. That is unfortunate. In this context, it is not surprising to see Gazprom take advantage of the system, even more so as it enjoys the status of national champion.
For an analysis of the dark side of Gazprom, readers can read the well-documented work of Roman Kupchinsky “Gazprom’s European Web.” Those interested in Gazprom’s perspective and strategy can go directly to Gazprom’s website at: www.gazprom.com. As to finding an answer to the question: “Angel or Demon?,” it is a very subjective matter as it really depends on what is at stake for whom and on the criteria used to judge…
Technorati Tags: (GAZP), Gazprom, guest post, oil-&-gas
Standard & Poor’s regards the increasing concentration of UK banking among a few players as a positive factor, even as it lowers its ranking on the sector.
Standard & Poor’s Ratings Services no longer classifies the United Kingdom (AAA/Negative/A-1+) among the most stable and low-risk banking systems globally “due to our view of the country’s weak economic environment, the reputational damage we believe has been experienced by the banking industry, and what we see as the high dependence on state-support programs of a significant proportion of the industry.”
In its latest Country Risk Assessment (Premium) S&P says “We therefore place the U.K.’s banking system in Group 3 out of our 10 Banking Industry Country Risk Assessment (BICRA) groups, which primarily reflects our view of relatively high leverage in the U.K. economy and the losses the industry could bear during the deleveraging process. ”
“…We expect that systemwide domestic nonperforming and impaired loans will peak in 2010 and remain elevated through 2011. In our opinion, credit demand in the U.K. will remain muted, and banks’ net interest margin will continue to be narrow due to the low interest rate environment. The U.K. banking industry will, in our view, have limited opportunity in 2010 and 2011 to increase earnings to absorb high credit loss charges.”
Relatively high concentration is a positive factor
“The U.K. demonstrates a higher level of concentration compared to the U.S. banking system, for example. We estimate that the four largest banking groups account for 80% of personal current accounts, three-quarters of credit cards and retail savings, 70% of branches, and 50% of personal loans and outstanding residential mortgages. In our view, a strong domestic retail and commercial banking franchise enables good pricing power, operational efficiency, and a good base from which to expand overseas and into other banking business lines, such as investment banking. We consider the business profile of these four banks to be a strength for the ratings, reflective of their strong market positions and diversity.”
The chart above shows the gap in asset size between the four major banking groups ( Royal Bank of Scotland Group (RBS), Barclays (BARC), Lloyds Banking Group (LLOY) and HSBC (HSBA) and the next two largest lenders Santander UK (formerly Abbey National PLC) and Nationwide Building Society. “However, we believe this understates their prominent role in retail banking and their sizable branch network. Including these two institutions, the BoE estimates that together the six-largest banking groups account for around 65% of the stock of lending to businesses, 50% of the stock of consumer credit, and 70% of the stock of mortgage lending at the end of 2008.”
Technorati Tags: (Barc), (HSBA), (lloy), (rbs), Banco Santander, banking, Barclays, HSBC, Lloyds Banking Group, Nationwide, royal-bank-of-scotland, UK banks
As the markets closed today there were around 300 Apple-related media citations of analysts, according to our sibling site Alacra Pulse. Pulse is an interesting barometer of what’s hot, but never before have we seen this level of analyst citation. Scanning through the Pulse rankings gives a visceral sense of the zeitgeist on a company, as it tracks not just traditional media citations, but also financial and other relevant blogs that pass muster with Alacra’s criteria.
The tone of the majority of technology blogger/analyst comments on Apple’s (AAPL) iPad, is one of disappointment, ranging from mild to severe, though there are positive exceptions. Their disappointments fall into a few areas:
- The iPad does not have enough breakthrough attributes to be a game changer, and is more of an oversized iTouch than a revolutionary device (e.g: no camera or multitasking).
- It won’t be the savior of newspapers and magazines.
- iPad (and iPhone) users will continue to be saddled with the creaking AT&T wireless network.
- The name had many wondering if Apple had any women on the naming committee and led to ridicule, including an interview on NPR with the writers of Mad TV’s iPad skit. Fujitsu could be doing Apple a favor if it asserts its claim to the iPad trademark.
The main positive surprise was the “aggressive” price of $499 and up. This makes it a more viable alternative to Amazon’s (AMZN) Kindle and other e-readers than had been expected, though it also may be that the iPad’s limitations make it hard to justify the closer to $1000 price that had been widely rumored.
Wall Street analysts were more positive, led by Piper Jaffray & Co’s Gene Munster who told Bloomberg that the iPad was “an amazing device” and that investors needed to be patient.
While the street analysts focused on the market potential for the product, the industry analysts seemed to compare the iPad to what they had imagined it could be in the weeks leading up to the announcement.
Still, the street analysts had a big miss on the wireless angle. There were widespread expectations that Apple would announce an end to its exclusive arrangement aith AT&T (T) and make the phone available through Verizon (VZ), or at a minimum use Verizon for the wireless iPad. Far from it: Apple actually expanded its deal with AT&T to include the iPAd.
On Jan 20 Alacra Pulse shows TheStreet.com reporting that “The hotly anticipated Apple Tablet — or the Apple Newton II — will feature a wireless chip made by Qualcom.”. . . “This discrete little fact would confirm that Apple has chosen Verizon as its telco partner, says Northeast Securities analyst Ashok Kumar.” Whoops.
Mashable’s Stan Schroeder has a thoughtful take on what to make of the iPad and puts the missing features into context. “The way I see it, the iPad is not about creating; it’s all about consuming content.”
Investors seem to agree with the naysayers (for now), pushing Apple’s stock price down 4 percent, though given the unprecedented hype leading up to the announcement a disappointment was almost inevitable.
Technorati Tags: (T), AAPL, Amazon, AMZN, Apple, Apple tablet, AT&T, Fujitsu, iPad, Kindle
The Federal Reserve Bank of New York (FRBNY) and the U.S. Treasury initially rolled out the Term Asset-Backed Securities Loan Facility (TALF) program to revive the asset-backed securities (ABS) market, but other sectors are also benefitting from the program, particularly commercial mortgage-backed securities (CMBS), Standard & Poor’s says.
S&P’s latest Quarterly TALF Report (Premium) discusses how the program has played an important role in improving market sentiment toward CMBS and putting the CMBS market on the road to recovery.
“So far, only one new issue CMBS transaction has used the program since the FRBNY accepted CMBS as eligible for TALF,” said credit analyst David Henschke. “That transaction, however, marked a significant turning point because it was the first major U.S. CMBS deal in nearly a year and a half. And it paved the way for two non-TALF CMBS deals, which further promoted price discovery for issuers and investors.”
The FRBNY expanded the TALF program to include newly issued CMBS in June 2009 and legacy CMBS in July 2009. Since July 2009, loan requests under TALF to purchase legacy CMBS have averaged approximately $1.5 billion per month.
Despite this relatively small usage, cash CMBS super-senior spreads in the secondary market have narrowed significantly since the inception of TALF from a high of swaps plus 1,150 basis points (bps) in March 2009 to their current level of swaps plus 435 bps.
In the report, Standard & Poor’s also reviews its rated ABS transactions that were used as collateral for TALF loans during the 11 rounds of TALF funding, including auto loan and lease, credit card, student loan, equipment, and dealer floorplan. The report also compares TALF for ABS with TALF for CMBS.
Technorati Tags: ABS, asset-backed-securities, CMBS, structured-finance, TALF
Guest Post by Oxford Analytica
President Barack Obama yesterday pledged in his State of the Union address to create a bipartisan commission on deficit reduction.
However, there are three separate proposals for bipartisan commissions to address the 1.35 trillion dollar federal budget deficit, and to make cuts in related ‘entitlement’ programs, making the rounds in Washington, sponsored by, respectively:
- President Barack Obama;
- Senate Budget Committee Chairman Kent Conrad and ranking Republican member Judd Gregg; and
- a bipartisan Brookings Institution policy group featuring former Republican Senator Pete Domenici and Alice Rivlin, former President Bill Clinton’s director of the Office of Management and Budget.
The Conrad-Gregg commission would have been powerful, since it could compel a vote in Congress, but it was, in effect, killed off by political objections from party leaders. That leaves the president’s commission, which could be significantly influenced by the Domenici-Rivlin group’s findings, as the most prominent exponent of fiscal consolidation.
Presidential initiative. Obama intends to create the commission by executive order, and charge it with reducing the deficit to 3% of GDP by 2015:
- The commission would have 18 members (ten Democrats and eight Republicans) and would require 14 votes to make a recommendation.
- Its report would be submitted after November’s mid-term congressional elections.
The mooted Conrad-Gregg commission was substantially similar in its makeup and mandate. However, since it would have been legally constituted by an act of Congress, it could have compelled a vote on its proposals on Capitol Hill. This would have made resisting or avoiding its recommendations politically awkward for many lawmakers, increasing the chances for legislative action on deficit reduction. The president’s commission would lack this important power.
Opposition. However, all of the commission proposals have elicited significant opposition, for three principal reasons:
- Political wariness. Many past presidential commissions have been political devices designed to put off decisions (eg until after the next election day), avoid or distribute responsibility for controversial decisions (as in the case of the military base closing commissions) or serve to burnish the short-term political credentials of their initiators (eg Obama’s reputation for fiscal prudence).
- Substantive divisions. There are also substantive divisions between the two parties on the best means of effecting fiscal consolidation. Unlike the commissions convened to close military bases, in which there was a shared understanding that fewer bases were needed, there is no consensus on budget or entitlement reform.
- Fear of ’success’. Indeed, the main concern shared by both parties is that the commission might actually succeed. Deficit reduction is only achievable, as Conrad has observed, if everyone “jumps off the cliff together”. The trouble is that making ‘the jump’ is politically fraught for both parties, in different ways. Since the most equitable approach to deficit reduction would likely involve a combination of higher taxation and significant spending cuts, both parties have reason to fear ’success’.
Conditions for success. Bipartisan commissions can help provide cover for partisan negotiators who already want to strike a deal, particularly if the principal political figures (who are not necessarily part of the commission) believe that a deal is in their interest. Absent prior openness to an agreement, a commission is unlikely to produce such a bargain. An imminent crisis that all prefer to avoid is the sort of stimulus that helps to overcome obstacles to a deal.
Outlook. In the current situation, the fiscal hazards facing the United States are significant, but a crisis is not likely to occur in the immediate future. However, the conditions for success could be more favorable next year. Obama may need to look as though he is successfully addressing the country’s fiscal woes ahead of the 2012 election, and the Republicans may want to achieve as favorable a tax settlement as possible when former President George W Bush’s 2001 tax cuts expire at the start of 2011.
Additional Oxford Analytica reports can be found at the Alacra Store.
Technorati Tags: budget-deficit, fiscal-policy, obama, U.S. debt
Technology Research Group, which takes a forensic accounting approach to research, has lowered its ratings on technology leaders Apple (AAPL) and Google (GOOG) following announcement of their quarterly results. TRG cites concerns about high valuation, accounting changes and earnings management. We are pleased to offer complimentary downloads from the Alacra Store of TRG’s latest reports on Apple and Google.
Selected Excerpts:
- Apple (AAPL) warrants a sizeable premium. Whether a 30 plus earnings multiple can be justified is the more relevant question. Recent developments leave us less confident. We are moving to a “Sell” rating and establishing a $197 price objective (assumes a multiple of 25 times EPS estimate). This is not a short sell recommendation. It refers to protecting profits and managing downside risk only.
- Over the last two quarters in particular, a few operational and earnings quality-related irregularities surfaced. Given the appreciation in Apple’s stock over the past year and a pricey valuation, we believe the safe play is to protect profits. Should these issues stabilize, we would reconsider our rating.
- There may be more to (Apple’s) sales backlog reduction than just accounting changes. The severity of the revision stands out. Compared to deferrals reduction (vs. F1Q09), the adjustment to F1Q10 revenue was disproportionately larger than restatements of historical quarters (FY07-FY09).
- We wouldn’t categorize (Google’s) earnings management as egregious, but there are some serious concerns. R&D expenses declined 15% Y/Y in the fourth quarter (in basis points as a % of revenue). For the year, the ratio of R&D to sales was down only 6% (12.02% vs. 12.82% in 2008). Actions in the fourth quarter were not a matter of circumstance. They were deliberately planned.
- Risk/reward is far less favorable than it used to be. We believe protecting profits is the safe play. We are moving to a “Sell” rating and establishing a $536 price target (assumes 23 times 2010 EPS estimate). Please note this is not a short sale recommendation. Stepping in front of a sell-side and institutional favorite would be a risky endeavor at this time. Things can change. We’ll be watching.
These research reports on Apple and Google have been made available for complimentary download from the Alacra store for 30 days by special arrangement with Technology Research Group, an Alacra content partner. After 30 days, the reports will revert to their regular Alacra Store price of $25 each)
For additional free research reports from the Alacra Store click here
Visit Alacra Pulse for latest analyst comment on Apple and Google.
Technorati Tags: (GOOG), AAPL, Apple, free research, Google
Standard & Poor’s Ratings Services thinks it’s unlikely that banks will resume the risky practices and policies whose apparent failure forced the government to shore up the U.S. banking system in 2008 and 2009.
Instead, in S&P’s view, banks will likely revert to a more conservative strategy based on a “loan-to-own” mindset versus the “originate to distribute” approach that exposed the largest financial institutions to the downside of aggressive underwriting and excessive leverage.
In fact, most banks have already begun to recast themselves in this mold. This trend may be partly a matter of sound business, to the extent that it represents a step toward regaining market confidence. It also reflects stricter regulatory supervision–current and anticipated–that aims to lessen systemic risk in the banking sector, partly with accounting changes that will likely reduce, and perhaps eliminate, the incentives for off-balance-sheet transactions.
Future financial-sector stability will depend on the economy’s ability to right itself, and on the capital markets’ willingness to step in by providing liquidity and extending credit once the government steps out. For this to happen, credit quality on the banks’ legacy books of business needs to stabilize.
If the credit cycle continues to moderate, banks’ creditworthiness, and therefore our ratings on banks, could stabilize by early 2011. If not, the result could be renewed market anxiety about asset valuations and the adequacy of bank capital positions.
“Either way, we believe that governments will remain more heavily involved than before in the financial industry. Banking is, and has historically been, a competitive global business that motivates financial institutions to innovate to grow and maintain access to the capital markets. It’s now obvious that this environment can lead to excesses that can be dangerous in a confidence-driven business. We believe that regulation alone can’t eliminate these risks. But it can create robust measurement, monitoring, and enforcement that prevents institutions from endangering the financial system.”
Thus, the “new normal” for banks, we think, will be an environment that emphasizes solid, sustainable sources of deposit funding and lower leverage–and that probably will lead to lower but less-volatile returns for most U.S. banks.
For details see Back To The Future For The U.S. Banking System? (Premium)
Sentiment for EMEA commercial real estate picked up in H2 2009, but Moody’s remains cautious about a significant value recovery.
In Moody’s view, a few pre-conditions need to be met before the CMBS market can return.
The main ones are:
(i) continuing stability of the debt capital markets once central banks and governments progressively withdraw their support;
(ii) a sustainable recovery of the CRE market;
(iii) a broad return of CRE lending and;
(iv) improved sentiment towards the refinancing risk of outstanding CRE loans.
Although some progress was made last year, it will take more time before those conditions are fully met.
A potential capital market exit for CRE loans may take the form of “CMBS 2.0”
Looking beyond 2010, Moody’s expects that next to balance sheet lending, the capital markets will still play an important role in financing commercial real estate. This will be necessary to close the gap between the significant refinancing volumes due over the next years and the limited capital expected to be provided by banks. Covered bonds can bridge some of this gap but they are limited to the senior portion of loans and the bank issuing them retains the risk on balance sheet. Some form of CMBS will still be needed by banks to fully transfer the risk to the capital markets.
In Moody’s view, it is possible that, next to the legacy stock of CMBS transactions, a new generation of deals will start to emerge in the primary market (often referred as “CMBS 2.0” by market participants). These new deals will most likely contain lower leveraged loans and avoid some of the structural shortcomings of legacy deals. As a consequence, Moody’s expects that “CMBS 2.0” would be issued at tighter spreads than those at which pre-crisis deals trade in the secondary market.
For details, see 2009 Review and 2010 Outlook EMEA CMBS.
Technorati Tags: CMBS, CMBS 2.0, commercial-real-estate, Covered Bonds, EMEA
Let’s hope The New York Times’ (NYT) plan to charge for online content works: the company is ranked one of the most risky media investments based on Audit Integrity’s accountancy and governance risk. It is exceeded only by Sirius XM Radio (SIRI).
Scripps Network Interactive (SNI) has the best risk ranking among media companies.
Interestingly, the higher risk companies have been performing better than more conservative companies, the opposite of the usual case.
The current market environment is showing classic signs that it is, for the moment, disregarding risks.
Audit Integrity says this “is simply a function of the market responding to the pendulum having swung too far in the downward direction in 2008.”
Full free report and raking available here.
Technorati Tags: (NYT), (SIRI), (SNI), media companies, newspapers, Scripps Network Interactive, Sirius XM Radio, The New York Times
