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Friday, April 11, 2008

GE Disappoints, Citing Finance: Bottom? What Bottom?

GE disappointed and has gapped down over 11% pre-market. Honestly, what did you think would happen, continued, super, hyper growth in the midst of a GLOBAL credit crunch?

GE Says Profit Fell, Citing Finance; Forecast Reduced (Update3): “General Electric Co. reported its first decline in quarterly profit since 2003, missing analyst estimates with a 12 percent drop in earnings as a freeze-up in credit markets blocked asset sales and forced it to write down the value of investments.

The world's third-largest company by market value fell as much as 11 percent, the most since 1987, in early New York trading after GE also cut the full-year forecast that Chief Executive Officer Jeffrey Immelt had once told sharesholders was “in the bag” for 2008.”

Everything GE does is related to finance, requires financing or is financed by GE.

“General Electric's miss came without warning as it was forced to reduce the value of some securities in the last two weeks of March as capital markets seized, Immelt said. That also prevented GE from selling some finance assets. GE put its U.S. credit card business and Japanese consumer finance units up for sale last year. The health-care unit also trailed expectations.

Farifield, Connecticut-based GE missed its own forecasts for its commercial and consumer finance units.”

This should be the catalyst for the next leg down. 1390 was tested and held on the S&P 500. The trend remains in tact and remains DOWN. This bounce is over.

WaMu Estimate Cut by Goldman; Short Sell Recommended (Correct): “Washington Mutual Inc., the largest U.S. savings and loan, had its earnings estimate cut by Goldman Sachs Group Inc. analysts, who recommended selling the shares short. The lender declined 5.9 percent in early trading.

Washington Mutual will probably lose $3.30 a share this year, Goldman Sachs analysts, including New York-based James Fotheringham, said today in a note to investors. Goldman previously forecast a 2008 loss of $1 a share for the Seattle- based company.

The lender raised $7 billion this week from a group of investors led by David Bonderman's TPG Inc. after losses on subprime loans ate up capital. Washington Mutual may have a total of $23 billion in mortgage-related losses, Goldman said today. The firm cut its 12-month price target on shares of Washington Mutual, also known as WaMu, by 17 percent to $10.

“Given WaMu's disproportionate exposure to states” where home prices are forecast to decline, Goldman expects losses between $17 billion and $23 billion, the analysts wrote.”

Wow. WaMu desperately raises $7 billion and pops about 30% that day and Goldman immediately pounds in short? That can’t bode well for WaMu at all.

Personally, I think WaMu is dead and just doesn’t know it yet. Insolvent. Bankrupt. Great posts on WaMu:

Thursday, April 10, 2008

Credit Losses and the Shape of the Recession

Equities the world over have bounced nicely, with the S&P 500 ‘melting up’ as high as 1390. This got the usual Bulltards out calling the bottom in ‘financials’, in ‘builders’ in ‘tech’ and even in the ‘economy’.

Subprime losses that have been BOOKED total $245 billion. This number is HUGE to be sure, but that does not mean it’s all priced in. Losses are expected to mushroom into the TRILLION dollar range.

Subprime Bank Losses Reach $245 Billion With WaMu, HSH: Table: “The following table shows the $245 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 70 of the world's biggest banks and securities firms.

Washington Mutual Inc., the largest U.S. savings and loan, said this week it will set aside $3.5 billion because of expected losses on home loans during the first quarter. HSH Nordbank AG, a state-owned German bank, said yesterday it wrote down 1.3 billion euros ($2 billion) last year.

The charges stem from the collapse of the U.S. subprime- mortgage market. The figures, from company statements and filings, also reflect some credit losses or writedowns of mortgage assets that aren't subprime as well as charges taken on leveraged-loan commitments.

Only writedowns and provisions that have filtered through to the income statement are included. Asset value reductions that some banks preferred to keep on their balance sheet and not charge against earnings are excluded.

All numbers are in billions of U.S. dollars, converted at today's exchange rate if reported in another currency. They are net of financial hedges the firms used to mitigate losses.”

Goldman Sees Credit Losses Totaling $1.2 Trillion: “Goldman Sachs forecasts global credit losses stemming from the current market turmoil will reach $1.2 trillion, with Wall Street accounting for nearly 40 percent of the losses.

U.S. leveraged institutions, which include banks, brokers-dealers, hedge funds and government-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note released late on Monday.

Losses from this group of players are crucial because they have led to a dramatic pullback in credit availability as they have pared lending to shore up their capital and preserve their capital requirements, they said.

Goldman estimated $120 billion in write-offs have been reported by these leveraged institutions since the credit crunch began last summer.”

Goldman Sees Subprime Cutting $2 Trillion in Lending (Update5): “The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a “substantial recession” in the U.S., according to Goldman Sachs Group Inc.

Losses related to record home foreclosures using a “back- of-the-envelope” calculation may be as high as $400 billion for financial companies, Jan Hatzius, chief U.S. economist at Goldman in New York wrote in a report dated yesterday. The effects may be amplified tenfold as companies that borrowed to finance their investments scale back lending, the report said.”

There is no way ANYTHING has bottomed. In fact, the slide down is about to ACCELERATE. This won’t be one a quick and shallow recession. This not a ‘V’ shaped recession. This almost certainly is a ‘U’ shaped or ‘L’ shaped recession with a very real possibility of a ‘\’ shaped damn near PERPETUAL recession.

Related Posts:
A + B = \
Case for an “L” Shaped Recession

Wednesday, April 9, 2008

Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

More important downgrades done ever so quietly…

S&P downgraded four mortgage insurers, MGIC Investment, Old Republic, PMI Group, and Radian Group and nobody really noticed. All those hedges the hedgies, major investment houses and banks put on through these firms are increasingly likely to be WORTHLESS. Expect more massive write downs this quarter as that reality starts to sink in.

I’ve put up the Credit Default Swap (CDS) spread charts up. To keep it simple, high spreads are bad. The higher the spread, the greater the cost of buying insurance against default. Big, sudden spikes represent the rapid deterioration of perceived credit quality. Any spreads near 1000 start to get problematic. When spreads are high enough, sellers of insurance will demand the spread plus an up front lump sum. This lump sum is not represented on these charts. Consequently, these charts UNDERSTATE current credit risk.

Notice how things have improved somewhat? Well, don’t get too giddy with Bullish optimism. The spreads have not come back nearly enough for that.

Notice how the credit stress isn’t just concentrated among the Guarantee companies, but spread nicely among everybody from the Banks, Brokers, Builders, and REITS? That’s why it’s called a GLOBAL credit bubble and a GLOBAL credit crunch.

For other important downgrades that were SNUCK in when nobody was really looking, see my recent post Quiet Sneaky Little Downgrades: CFC, MBI

S&P Release on Four U.S. Mortgage Insurers:
“Standard & Poor's Ratings Services said today that it lowered its counterparty credit rating on MGIC Investment Corp. (MTG.N: Quote, Profile, Research) (MGIC Investment) to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on the mortgage insurance subsidiaries (MGIC) to 'A' from 'AA-'. The ratings were removed from CreditWatch, where they were placed on Jan. 24, 2008, with negative implications. The outlook is negative.

Standard & Poor's also said that it lowered its counterparty credit rating on Old Republic International Corp. (ORI.N: Quote, Profile, Research) (ORI) to 'A' from 'A+' and its counterparty credit and financial strength ratings on ORI's core subsidiaries to 'AA-' from 'AA'. The ratings were removed from CreditWatch, where they were placed on Feb. 25, 2008, with negative implications. The outlook is negative.

At the same time, Standard & Poor's lowered its counterparty credit rating on PMI Group Inc. (PMI.N: Quote, Profile, Research) (PMI Group) to 'BBB+' from 'A' and its ounterparty credit and financial strength ratings on PMI Group's mortgage insurance subsidiaries in the U.S. (PMI) and Europe (PMI Europe) to 'A+' from 'AA'. The ratings were removed from CreditWatch, where they were placed on Feb. 13, 2008, with negative implications. The outlook is negative.

In addition, Standard & Poor's lowered its counterparty credit rating on Radian Group Inc. (RDN.N: Quote, Profile, Research) (Radian Group) to 'BBB' from 'A-' and its ounterparty credit and financial strength ratings on Radian Group's mortgage insurance subsidiaries (Radian MI) to 'A' from 'AA-'. These ratings remain on CreditWatch, where they were placed on Feb. 13, 2008, with negative implications.

“”The downgrades reflect weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance,” explained Standard & Poor's credit analyst James Brender.When we resolved the CreditWatch status of several mortgage insurer ratings on Nov. 21, 2007, we stated that if unemployment rose above 6%, incurred losses for all mortgage insurers would be significantly higher than our expectations. Our most recent macroeconomic forecast shows unemployment reaching 5.8% in 2009, and there is considerable uncertainty in the job markets. The deterioration in the housing markets has also been worse than our expectations. Now, we believe median home prices will decline 20% from the peak in 2006. By contrast, the forecasts we used in November 2007 assumed a decline of 11%. As a result of the deterioration in the housing and job markets, Standard & Poor's believes mortgage insurers' operating results for 2008 and 2009 will compare unfavorably with our previous expectations. Our current forecasts predict that most companies will not generate an underwriting profit until 2010, but individual results will vary.”

Related Posts:
Quiet Sneaky Little Downgrades: CFC, MBI
Ambac ‘Bailout’: Why Bother?
Ambac Bailout: The Wheels Come Off
Monoline Bailouts: The Great Circle Jerk

Tuesday, April 8, 2008

Slow Motion Housing Crash: UK, Spain

U.K. House Prices Fall the Most Since 1992, HBOS Says (Update4): “U.K. house prices dropped by the most since 1992 in March as the seizure in credit markets worldwide forced banks to pull mortgage offers, a report by HBOS Plc showed.

The average cost of a home in Britain fell 2.5 percent to 191,556 pounds ($379,000) from February, HBOS, the U.K.'s biggest mortgage lender, said in a statement today. The 1 percent drop in the first three months of this year from the fourth quarter was the biggest since 1995.

The pound fell after the report on speculation that the Bank of England will reduce the benchmark lending rate on April 10 for the third time since December to prevent an economic slump. Abbey, the U.K. unit of Spain's Banco Santander SA, today became the last major British lender to stop offering home loans that require no down payment as rising funding costs hamper banks' ability to lend.”

There really isn’t much to say, except now that the trend has changed from up to down, so too will the behavior of financial firms change from loose to tight despite the very best efforts of the authorities. Banco Santander for example has just now realized that it would be in their very best interests to cease with risky, no down payment loans because home prices are now falling. This now has the fantastic effect of freezing out of the real estate market EVERYBODY who wants, needs or has a no down payment loan. This basically bans the financially strapped and the financially illiterate from getting into the real estate market with the consequence of reducing the BID in real estate markets in general as this BUYING POWER is removed. This also has the effect of completely screwing the financially strapped and the financially illiterate that got into real estate with no down payment in the last five years. When their mortgages are up, they will have nowhere to go to re-finance and they will be forced to LIQUIDATE at the most inopportune time. Since they will no doubt be underwater on their homes, everybody from the unhappy former homeowner down to the bank will have to eat their faire share of the losses.

Spanish Property Auction Flop Brings Down Gavel on Housing Boom: “The event shows the depth of Spain's housing bust after prices tripled in the past decade. In January, the government's housing policy director, Rafael Pacheco, called the slowdown “moderate and orderly” after January sales volume fell 27 percent from a year earlier as the global credit shortage forced banks to reduce lending.”

If a 27% drop in sales volume is moderate and orderly, then I would love to have Rafael demonstrate what his understanding of SEVERE and say CHAOTIC is.

“Spaniards' real estate obsession -- the right to “a decent and fitting home” is in the constitution -- helped drive a 15- year economic boom that saw the economy almost triple to 1.1 trillion euros as the country overtook Italy in income per head.”

The Spanish economy tripled on wild speculation in real estate as cheap money from the ECB flooded the country. Upon joining the ECB, interest rates in Spain dropped. More importantly, real rates turned negative. That of course made this BUBBLE INEVITABLE. Only a SUCKER didn’t borrow madly. The smart money is of course long gone, leaving behind only the bagholders.

If the economy tripled, and a good chunk of it was on wild real estate speculation, how much of that 1.1 trillion Euros will turn out to be nothing but the ILLUSION OF PROSPERITY?

Hint: In Japan real estate AND equity prices dropped by 90% over 15 years after their shockingly similar bubble burst.

Sure, this time could be different… but not by much.

But don’t worry: Cramer Off His Meds, Calls for Housing Shortage!

Related Posts:
More Ghost Towns
UK: Defiantely The Next Important Victim
Ghost Towns? In Spain?

Monday, April 7, 2008

Quiet, Sneaky Little Downgrades: CFC, MBI

After the initial frenzied rally on Tuesday, the rest of the week consisted of quiet trading… and that’s despite Non-Farm Friday. Equities are digesting their recent gains and are settling into a tight trading range. The market doesn’t seem to have noticed some important significant developments… yet.

Moody's CUTS Countrywide Bank rating to "D": “Moody's Investors Service on Thursday cut its bank financial strength rating on Countrywide Bank to "D," or default, citing liquidity issues at its parent, Countrywide Financial Corp (CFC) and Countrywide Home Loans.

Liquidity at Countrywide Financial and Countrywide Home Loans worsened substantially in the first quarter amid continued weakness in residential mortgages and recessionary forces in the U.S. economy, Moody's said in a statement.

The liquidity issues could impair Countrywide Bank's franchise, Moody's Vice President Craig Emrick said in a statement.”

On Thursday, Moody’s smashed Countrywide Bank. “D” is for DEFAULT. This went unnoticed by the markets. However, as always… the devil is in the details:

“The downgrade does not reflect Countrywide's planned acquisition by Bank of America, however, Moody's said. The rating was lowered from "C-minus" but is on review for upgrade pending completion of the Bank of America acquisition, Moody's said.”

What does all this mean? Well, simply put the acquisition MUST go through or you have one fairly large, dead bank. Without Bank of America (BAC), there would be no Countrywide Bank. That is how quickly things have deteriorated. The question is, did Bank of America expect things to get this bad when they made their offer? Does this represent a ‘material’ change? Would this be a way out of the deal for BAC?

“Moody's said it believes Countrywide has the liquidity and capital necessary to operate through the planned closing of the proposed acquisition, which is expected in the third quarter of 2008.”

Remember the sheer panic and fear of a month ago with respect to the monoline insurers like MBIA and Ambac? Quietly, after the close on Friday, Fitch DOWNGRADED MBIA stripping the insurer of its triple-A rating.

MBIA Loses AAA Insurer Rating From Fitch Over Capital (Update5): “Fitch Ratings cut MBIA Inc.'s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking.

MBIA, the world's largest financial guarantor, would need as much as $3.8 billion more in capital to deserve an AAA, New York-based Fitch said today in a report. The outlook is negative, Fitch said.

Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness. The two companies disagree over how much capital MBIA needs to absorb losses on the bonds it insures. Moody's Investors Service and Standard & Poor's both affirmed their AAA ratings earlier this year.”

Remember the daily bailout and buyout rumors of a couple months ago? What happened to them? Carefully and quietly the media has shifted their attention away from one of the most important links in this credit mess… making it LOOK LIKE, the problems have GONE AWAY. They haven’t.

In fact, things have continued to deteriorate. Even accelerate. Below is the chronology of bond insurers’ credit ratings:

MBIA Inc's (MBI) MBIA Insurance Corp
Feb. 26 - Moody's removes Aaa rating from review for DOWNGRADE, assigns NEGATIVE outlook.
Feb. 25 - S&P removes AAA rating from review for DOWNGRADE, assigns NEGATIVE outlook.
Feb. 5 - Fitch puts AAA rating on review for DOWNGRADE.
Jan. 31 - S&P puts AAA rating on review for DOWNGRADE.
Jan. 17 - Moody's puts Aaa rating on review for DOWNGRADE.
Jan. 16 - Fitch affirms AAA rating with stable outlook.
Dec. 19 - S&P changes outlook on AAA rating to NEGATIVE from stable.
Dec. 14 - Moody's affirms Aaa rating, changes outlook to NEGATIVE from stable.

Ambac Financial Group's (ABK) Ambac Assurance Corp
Mar. 12 - S&P removes AAA rating from review for DOWNGRADE, outlook NEGATIVE.
Mar. 12 - Moody's ends DOWNGRADE review, confirms AAA rating, outlook NEGATIVE.
Mar. 12 - Fitch affirms AA rating, outlook NEGATIVE.
Feb. 25 - S&P affirms, leaves on review for DOWNGRADE.
Jan. 18 - Fitch CUTS AAA rating to AA.
Jan. 18 - S&P puts AAA rating on review for DOWNGRADE.
Jan. 16 - Moody's puts Aaa rating on review for DOWNGRADE.
Dec. 14 - Moody's affirms Aaa rating with stable outlook

Dexia's (DEXI) Financial Security Assurance (FSA)
Jan. 24 - Fitch affirms AAA rating with stable outlook.
Dec. 19 - S&P affirms AAA rating with stable outlook.
Dec. 14 - Moody's affirms Aaa rating with stable outlook.

FGIC Corp's Financial Guaranty Insurance Co
Mar. 31 - Moody's CUTS A3 rating to "Baa3," on review for further DOWNGRADE
Mar. 28 - S&P CUTS A rating to BB with NEGATIVE outlook.
Mar. 26 - Fitch CUTS AA rating to BBB with NEGATIVE outlook.
Feb. 25 - S&P CUTS AA rating to A, on review with developing implications.
Feb. 14 - Moody's CUTS AAA rating to A3.
Jan. 31 - S&P CUTS AAA rating to AA.
Jan. 30 - Fitch CUTS AAA rating to AA.
Dec. 19 - S&P puts AAA rating on review for DOWNGRADE.
Dec. 17 - Fitch puts AAA rating on review for DOWNGRADE.
Dec. 14 - Moody's puts Aaa rating on review for DOWNGRADE.

Assured Guaranty Ltd's (AGO) Assured Corp
Dec. 19 - S&P affirms AAA rating with stable outlook.
Dec. 14 - Moody's affirms Aaa rating with stable outlook.
Dec. 12 - Fitch affirms AAA rating with stable outlook.

Security Capital Assurance's (SCA) XL Capital Assurance
Mar. 26 - Fitch CUTS to BB from A.
Mar. 5 - Moody's puts A3 rating on review for DOWNGRADE.
Feb 25 - S&P CUTS AAA rating six notches to A-minus, remains on review for DOWNGRADE.
Feb. 7 - Moody's CUTS AAA rating six notches to A3.
Jan. 31 - S&P puts AAA rating on review for DOWNGRADE.
Jan. 24 - Fitch CUTS to A from AAA.
Dec. 19 - S&P changes outlook on AAA rating to NEGATIVE from stable.
Dec. 14 - Moody's puts Aaa rating on review for DOWNGRADE.

Radian Group Inc's (RDN) Radian Asset Assurance
Mar. 28 - Moody's affirms Aa3 rating changes outlook to NEGATIVE from stable.
Jan. 31 - S&P affirms AA rating with stable outlook.
Dec. 14 - Moody's affirms Aa3 rating with stable outlook.
Sept. 5 - Fitch DOWNGRADEs to A-plus from AA.

Banque Populaire and Caisse d'Epargne's CIFG Guaranty
Mar. 31 - Fitch CUTS rating to A-minus, outlook NEGATIVE
Mar. 12 - S&P CUTS AAA rating four notches to A-plus, outlook NEGATIVE.
Mar. 7 - Fitch CUTS AAA rating three notches to AA-minus, leaves on review for further DOWNGRADE.
Mar. 6 - Moody's CUTS Aaa rating four notches to A1, outlook stable.
Feb. 25 - S&P affirms, retains NEGATIVE outlook.
Feb. 22 - Moody's puts Aaa rating on review for DOWNGRADE.
Feb. 5 - Fitch puts AAA rating on review for DOWNGRADE.
Dec. 19 - S&P affirms AAA rating with NEGATIVE outlook.
Dec. 14 - Moody's affirms Aaa rating, changes outlook to NEGATIVE from stable.
Nov. 22 - Fitch affirms AAA rating with stable outlook.

ACA Capital Holdings' (ACAH) ACA Financial Guaranty Corp
Dec. 19 - S&P CUTS to CCC from A.

Dollar Money-Market Rate Declines for First Time in Four Days: “The cost of borrowing in dollars for three months fell for the first time in four days, the British Bankers' Association said.

The London interbank offered rate, or Libor, for dollars dropped almost 2 basis points to 2.71 percent today, the BBA said. The comparable pound rate declined for a fifth day, by more than 3 basis points to 5.95 percent. The euro rate was little changed at 4.74 percent.”

Despite five straight up days in equities, it is only now that money market rates have even begun to creep down. The sustainability of this rally is therefore in doubt as financial system stress still remains elevated just below the surface…