There’s really only one topic in the zeitgeist this week: Barack Obama.
Following his groundbreaking victory on Tuesday, capping off a hugely impressive campaign, attention now turns to what the President-elect will do to revive the sagging economy, and also how he will do it.
His statement and press conference following a meeting with his all-star team of economic advisers was short on specifics and long on the need for a bipartisan approach. Cynics will say that it will soon be back to politics as usual, with Democrats in Congress eager to force through a very liberal agenda with little regard for the Republican minority. Still, Obama continues to talk the bipartisan talk, and defeated presidential candidate John McCain graciously did his part in calling for the nation to unite behind the new President. Obama has surprised us throughout his ascent to the presidency, so it may not be wise to bet against him.
In any case, the very severity of both the short term credit crisis and longer term fiscal challenges will work against any radical shift to the left, as Oxford Analytica and others have pointed out.
Other than the revelation that the Obamas will be looking for a hypoallergenic pooch, maybe even “a mutt like me,” Obama broke no real news but gave a steady and sober performance. The automobile industry should draw some encouragement from the press conference, as Obama made a strong statement of commitment to supporting Detroit.
On the other hand, he showed no signs of letting high earners off the hook despite the weakness of the economy, reiterating his plan to cut taxes only for the bottom 95 percent of taxpayers.
As The Economist points out “Like most politicians, Mr Obama will surely fail more than he succeeds. But he is a man of great dignity, superior talents and high ideals.”
But if President Obama performs even half as well as he did as candidate Obama, there is indeed hope.
Research Recap Quote of the Week:
The road ahead will be long. Our climb will be steep. We may not get there in one year or even one term, but America – I have never been more hopeful than I am tonight that we will get there. I promise you – we as a people will get there. - President-elect Barack Obama.
Technorati Tags: credit-crisis, economic-policy, income taxes, obama, presidential-election, transition2008, Zeitgeist
Not sure if this is a sign that the credit crisis has touched bottom, but for the second straight week a non-financial post was the hot topic at Research Recap this week. Moody’s downgrade of the independent oil refining industry was the most-read post by far. Moody’s said a perfect storm of steeply falling demand and continued additions to refining capacity are hitting independent oil refiners’ profit margins, and the industry is expected to experience maximum stress through at least 2009. What’s more, the demand changes are structural and enduring.
Some of the same factors could mean that Exon Mobil’s (NYSE: XOM) record $14.8 billion quarterly profit will be the high water mark for profits for some time. Breakingviews notes in the New York Ties that the days of $145 a barrel are over, at least for the foreseeable future. “With oil now trading at around $65 a barrel, it will become harder to obscure the industry’s biggest challenge: declining reserves and increasingly inhospitable host nations.” Exxon Mobil must now consider buying a rival at home to protect itself from a worsening environment toward Big Oil abroad, breakingviews says.
Meanwhile, back on the credit crisis front, a consensus seems to be gathering around regulation of credit default swaps. Even though the demise of Lehman Brothers did not result in the feared unraveling of the CDS market, it remains clear that greater transparency and some sort of central clearing facility is needed. CreditSights thinks the ICE/TCC proposal has become the front runner over the CME/Citadel version. ICE got a further boost Thursday with its acquisition of The Clearing Corporation.
Worries about credit card debt continued to weight heavy, led by Moody’s prediction that writeoffs are likely to exceed the peak of previous recessions. Now Fitch Ratings notes that the recent jump in one-month LIBOR, combined with increasing chargeoffs and lower yields on credit cards, is creating a situation that will put U.S. credit card ABS transactions to the test over the next few months. “While spread compression due to the LIBOR jump alone is not a cause for rating action, the compounding effect of rising chargeoffs and higher funding costs could hasten rating actions going forward, particularly at the subordinate note level”.
Not to be outdone,corporate bonds continued to attract negative attention, with Fitch saying the junk bond default rate may reach a record level, and Standard & Poor’s predicting the rate may triple over the next year, reaching close to 10% under a pessimistic scenario.
Research Recap Quote of The Week:
…predictions of a third-wave of ‘liberalism’ — on the scale of the New Deal or Great Society-eras — is very premature. - Oxford Analytica
Technorati Tags: (XOM, CDS, corporate-debt, credit card ABS, credit card debt, credit-default-swaps, Exxon Mobil, financial-regulation, independent oil refiners, junk-bonds, oil refiners, Zeitgeist
As in the previous quarter, the global credit crisis dominated Research Recap’s Top Ten Posts of the third quarter, with only one post not related in some way to the market meltdown. Many of the posts turned out to be prescient, led by Fitch Ratings’ July warning that US Mortgage Insurers’ Troubles May Worsen. This prediction was borne out this month when Moody’s put several of the insurers on watch for possible downgrade.
In the runner-up spot was NERA Economic Consulting’s July report Subprime-Related Litigation on the Rise, which was buttressed by a Stanford Law School analysis showing that subprime lawsuits were running at double last year’s pace.
The bronze medal goes to the lone non-financial post, Ernst & Young’s July report US Oil Production Flat Over Past 4 Years, published near the peak of the recent oil price spike.
The fourth place post based on the International Monetary Fund’s December 2007 report examining the Role of Hedge Funds in Subprime Crisis Examined is approaching Hall-of-Fame status, consistently featuring among our top posts nine months after it was first published. The IMF also featured in the fifth place post in which Oxford Analytica drew on IMF and OECD data in September to conclude that Speculation Does Not Explain Apparent Housing Overvaluation.
The sixth place post based on a June Moody’s report, Global Junk Bond Default Rate Doubled in First Five Months, now seems modest. Standard & Poors now expects the speculative default rate to triple in the next 12 months. Standard & Poor’s served up the seventh most popular post, in which the ratings agency accurately assessed that Lehman Failure’s Impact on European Banks would be significant.
In what now seems like understatement, the eighth place post based on a June report from Audit Integrity was also right on the money: Credit Default Swaps Adding Rather Than Mitigating Risk? Moody’s July Guide To Interpreting Mark-to-Market Losses of Monolines took the ninth spot.
In what may now seem like wishful thinking, rounding out the top ten on a more optimistic note was KPMG’s July report Greentech Expected to Lead Resurgence of IPOs in 2010.
Technorati Tags: (LEH), CDS, credit-default-swaps, european-banks, green-tech, Hedge-Funds, housing, IPO, junk-bonds, Lehman, litigation, monoline-insurers, oil-exploration, oil-refining, private-mortgage-insurers, structured-finance, subprime, Zeitgeist
Perhaps reflecting an appetite for good news at a time when most of the news is unrelentingly bad, the most popular post by far this week at Research Recap was Agrochemical Sector a Bright Spot in Slowing Global Economy, based on a Standard & Poor’s report:
Thanks to continuing world population growth, improving standards of living, energy diversification into biofuels, and a cap on the amount of arable land available, the outlook for agrochemicals companies..remains favorable.
This will not come as music to organic food advocate Michael Pollan’s ears. In a lengthy open letter to the next President published in the New York Times Magazine, Pollan writes ” we need to wean the American food system off its heavy 20th-century diet of fossil fuel and put it back on a diet of contemporary sunshine. True, this is easier said than done — fossil fuel is deeply implicated in everything about the way we currently grow food and feed ourselves. To put the food system back on sunlight will require policies to change how things work at every link in the food chain: in the farm field, in the way food is processed and sold and even in the American kitchen and at the American dinner table. Yet the sun still shines down on our land every day, and photosynthesis can still work its wonders wherever it does.”
If any part of the modern economy can be freed from its dependence on oil and successfully resolarized, surely it is food.
Sounds great, but it’ll be a cold (or maybe globally warmed) day before the powerful forces of agribusiness and others allow this to happen.
Back to the bad news, S&P was also responsible for the second most popular post, its prediction that the US junk bond default rate will triple in the next 12 months and could reach 10% under a pessimistic scenario that appears more likely with each passing day of gloomy economic news and financial market turbulence.
S&P had some embarrassingly bad news of its own, along with Moody’s and Fitch as Congress took the ratings agencies to task for their role in the subprime mortgage meltdown. Paul Kedrosky highlights some of the more egregious comments.
Perhaps spurred by the upcoming election and debate over taxes, our post based on an OECD report showing the growing extent of income inequality in the US, took the third spot this week.
Our Research Primers continue to be popular and the latest one from CreditSights on the options for Credit Default Swaps Regulation was no exception. And rounding out the top five with another piece of bad news was Moody’s Sees Stress on Credit Card Industry Through 2009.
Research Recap Quote of The Week
Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact. - Former Federal Reserve Chairman Alan Greenspan acknowledging to Congress that his free market ideology pushed him to make decisions that he wished he had not made. (Transcript)
Technorati Tags: ABS, balance sheet, CDS, charge-off rate, credit card ABS, credit card borrowers, credit card debt, credit-crisis, credit-default-swaps, credit-ratings, delinquency rate, financial-regulation, Fitch, income inequality, junk-bonds, Moodys, poverty, presidential-election, speculative-grade-bonds, standard-and-poors, structured-finance, tax-policy, wealth, wealth-disparity, Zeitgeist
With the jury still out on the effectiveness of the myriad bank bailouts, topics related to the ongoing credit crisis and its fallout dominated the top posts this week. Visitors continued to come to Research Recap to keep up to date with ratings actions on financial companies in the new through our regular “Ratings Roundups.” Visitors were very interested in the OECD’s comparison of the differences in bank deposit insurance across countries. They might have taken comfort from Floyd Norris’s analysis in The New York Times showing that the impact of the banking crisis on the broader economy should be less in the US than in many other countries.
On a gloomier note, visitors were drawn to Moody’s warning that the credit crisis is likely to result in significant state and local budget cuts, including usually off-limits areas such K-12 education. Likewise there was strong interest in Fitch Ratings’ prediction of higher commercial real estate loan defaults.
Research Recap Quote of the Week:
We would be skeptical that a GM-Chrysler transaction could easily address our primary concern by resulting in a substantial increase of current liquidity for the parties involved.- S&P
Technorati Tags: (GM), banking-system, CMBS, commercial-real-estate, credit-crisis, municipal-bonds, state-and-local-government, structured-finance, Zeitgeist
A google search for “subprime” carried out 10 years ago would have yielded 14,500 results. Today that same search offers up 14.5 million results. A search for “credit default swaps” in October 1998 yielded 33,900 results, compared with over 1 million today, while results for “hedge funds” ballooned from 162,000 to over 8.5 million. By contrast, a search for “conventional mortgage” has risen only from 111,000 to 579,000.
Even allowing for extraneous factors, these are startling numbers. They help explain the continuing popularity of a Research Recap post from last December that combines “hedge funds” and “subprime.” Of course, interest in the massive liquidations by hedge funds no doubt played a part in making Role of Hedge Funds in Subprime Crisis Examined the top post of the week. Still, it just goes to show that good research has a long shelf life. So it’s worth taking a look back at that article by the International Monetary Fund’s Randall Dodd.
The article examines the role of hedge funds in the unfolding crisis, noting that Fitch Ratings warned of the risks in 2005.
“Hedge funds have quickly become important sources of capital to the credit market,” but “there are legitimate concerns that these funds may end up inadvertently exacerbating risks.”
That is because hedge funds, which invest in largely high-risk ventures, are not transparent entities—their assets, liabilities, and trading activities are not disclosed publicly—and they are sometimes highly leveraged, using derivatives or borrowing large amounts to invest, Dodd wrote. So other investors and regulators knew little of hedge funds’ activities, while, as Fitch Ratings put it, because of their leverage, their “impact in the global credit markets is greater than their assets under management would indicate.”
Among the potential remedies suggested by Dodd in December 2007: “applying industry standards and any existing regulations pertaining to the use of collateral (margin) to OTC derivatives and hedge fund borrowing.”
Likewise, the current meltdown had recent visitors looking back to our January 2008 Research Primer on Credit Default Swaps, based on a Fitch Ratings report.
More recently, our Ratings Roundups of recent ratings actions affecting financial institutions in the news continue to be popular, as is the Standard & Poor’s report detailing the sharp rise in delinquencies among not-quite-prime “Alt-A” mortgages.
Research Recap Headline of the Week:
Bonuses May Fall in London (The Wall Street Journal)
Technorati Tags: Alt-A, CDS, credit-crisis, credit-default-swaps, credit-ratings, Hedge-Funds, RMBS, structured-finance, subprime, Zeitgeist
Only time will tell whether Friday October 3 marked a turning point in the credit crisis. Final passage of the bank rescue bill, however flawed it may be, provides some hope that confidence can begin to be restored soon. But perhaps more significant is the spectacle of Wells Fargo (NYSE: WFC)and Citigroup (NYSE: C) fighting over Wachovia (NYSE: WB) If they both want such an impaired asset, maybe it’s a sign of light.
Still, our most popular post of the week, Recent Vintage Alt-A US RMBS Delinquencies up Sharply, suggests there is much more pain to come. Based on a report from Standard & Poor’s, this post pointed out that supposedly -almost-prime” Alt-A loans are going bad at a faster pace even than subprime loans. Also discouraging was Fitch Ratings US Prime Auto Loan ABS Losses Reach Record High, though the post did note that these securities are holding up relatively well.
Our summaries of ratings actions on financial institutions in the news continued to be well read, led by Ratings Roundup: B&B, Fortis, Citi/Wachovia, Dexia, Hypo.
It’s also nice to see a strong response to an audio post, based on the excellent work of Alex Blumberg and Adam Davidson featured on NPR. Their latest report explaining How the Commercial Paper Market Seized Up helped make it clear why the bailout plan was needed.
Finally, for a slight change of pace,the CreditSights report No Systemic Risk to Utilities Despite Constellation Merger was also well read.
Research Recap Quote of The Week:
After 24 months of seasoning, total delinquencies for 2006 represent approximately 18.54% of the current aggregate pool balance, a 208% increase over the 2005 vintage, which had 6.03% in total delinquencies after the same amount of seasoning. -Standard & Poor’s, commenting on mortgage securities backed by Alt-A loans.
Technorati Tags: (c), (WB), (WFC), ABS, Alt-A, auto-loans, Citigroup, credit-crisis, structured-finance, subprime, utilities, Wachovia-Corporation, Wells-Fargo-&-Company, Zeitgeist
The headline of last week’s Research Zeitgeist was ” The End of the World as we Know It.” There is indeed a palpable sense that financial markets will never be the same, but still no clear idea of what the new world will look like. This fact is illustrated by the difficulty “Washington” is having in reaching agreement on a plan to stabilize and unfreeze financial markets. It is clear that government will play a much more prominent and active role in the markets and the broader economy. It’s just a matter of the form and the duration of government involvement.
With at least one major financial institution going down every week, it’s no surprise that our daily “Ratings Roundup: feature has become very popular. Likewise, in the current gloomy atmosphere, it is to be expected that visitors are looking for signs of distress elsewhere in the financial system.
Of widespread interest this week were Oxford Analytica’s US Banking Crisis Turning Global, two reports from Moody’s, US Credit Card Performance Continues on Downward Trend and Investors in Corporate Bank Loans to see Higher Default Rates, and one from Standard & Poor’s, Commercial Real Estate is Second Shoe to Drop for US Banks.
Research Recap Quote of the Week:
In short, the financial crisis could lead to an overall systemic crisis through worsening local credit conditions, as well as through shrinking global real economy demand.- Oxford Analytica
Technorati Tags: ABS, banking-system, commercial-real-estate, corporate-debt, credit card debt, investment-banking, structured-finance, Zeitgeist
One of the aims of Research Recap is to provide educational background on financial and economic topics, so it is gratifying when our “Research Primers” attract attention. The latest of these, based on an article in the International Monetary Fund’s Finance & Development magazine, provides a useful history and explanation of Securitization. Indeed, the IMF publication is earning a reputation for this kind of thing. Its December explainer of the Role of Hedge Funds in the Subprime Crisis features among the top posts on a regular basis and this week was no exception.
The top post of the week by a considerable margin was Fitch Says Worst of Credit Storm is Over for US Banks, in which Fitch Ratings threw every meteorological metaphor in the book at the issue. Fitch also featured in another top post, noting that the decline in house prices was likely to accelerate resetting of payment rates on option adjustable rate mortgages to higher levels. In the same post, CreditSights wondered why delinquencies are running at a higher rate than they should be based on the pace of rate resets.
There’s no doubt that Sarah Palin captured the zeitgeist this week, and the inaugural edition of the WSJ glossy wealthy lifestyle magazine includes an interview with the Alaska Governor about her running (marathons, that is). Carried out before she joined the McCain ticket, the interview reveals that her biggest pitfall is breakfast. “I hate to admit it, but a skinny white-chocolate mocha is my staple in the morning.” Guess that takes the “latte factor” off the table as an attack weapon against Barack Obama.
Now that the euphoria of the Democratic and Republican conventions has been punctured by Palin and unemployment respectively, the focus should return to policy issues and what the respective tickets plan to do about a weak economy and fragile markets. First up, the much anticipated takeover of Fannie Mae and Freddie Mac.
Research Recap Quote of the Week:
Dependence on oil imports continues to be highest, reaching 95% in 2030. - International Energy Agency analysis of European Community energy policies.
Technorati Tags: banking, energy, Hedge-Funds, mccain, obama, palin, renewable-energy, securitization, subprime-mortgage, Zeitgeist
US regional banks were top-of-mind at Research Recap this week. Last week’s popular post from Oxford Analytica, Regional US Banks May Need Rescuing, was the most-read post this week, while S&P “Very Cautious” on US Regional Bank Credit Quality made the top five as well. Standard & Poors also nabbed the second spot with Distressed Finance Sector Junk Bonds at Stratospheric Level while Audit Integrity’s Forensic Analysis Gives Clues to Lehman Problems came in at number three.
Monoline Stock Price Rally Overdone, from CreditSights, was also popular, and has since been followed up wiith MBIA Takes the Best, Leaves FGIC with the Rest. CreditSights sees the reinsurance transaction involving MBIA and FGIC as a positive credit development for MBIA, but says it does little to solve FGIC’s longer term solvency issues.
Outside the credit markets, Forrester Research’s provocative prediction “Serious Gaming” to Take Off in Coming Years was also well read.
Elsewhere, the surprising upward revision in second quarter US GDP growth to 3.3% was a hot topic. Felix Salmon at Portfolio.com laments what he sees as the decline of the quality of government economic statistics. FT Alphaville, goes further calling the number “laughable.” Yves Smith at Naked Capitalism smells “manipulation for political purposes.” There’s no clear evidence of this: there do not appear to have been any cahnges in which the caluclations are made. But you don’t need to agree to wonder about the discrepancy between the implicit priced deflator used to measure inflation in the GDP calculation (1.2%) and the much higher CPI and PPI numbers.
Research Recap Quote of The Week:
In other words, there would be only two persons of working age for every person aged 65 or more in 2060, compared with four persons to one today. - Eurostat - commenting on demographic projections for the 27 European Community nations.
Technorati Tags: aging, credit-risk, demographics, economic-data, forensic-accounting, gaming, junk-bonds, Lehman, monoline-insurers, regional-banks, Zeitgeist