Conversations with Heinz and some with RR as well.
There might be a couple of dups as some of these were posed before Christmas, but most answers came in while I was away.
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Mish:
Bernstein raised EPS estimates for Countrywide Financial(CFC) for '04 to $3.94 from $3.91 and for '05 to $3.77 from $3.61. The firm reiterated its buy rating as the company has achieved the highest market share in the history of the U.S. residential mortgage market.
OK – so where to from here?
Heinz:
this one is high up on my list of shorting candidates. on the face of it, things can't get any better for CFC (in spite of a recent , oh, 40% decline in quarterly earnings?) - which means they can only get worse. the time to short everything connected to the housing bubble and the consumer credit/spending bubble is finally nigh, imo.
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Mish:
Bank of England hints at interest rate cut
politics.guardian.co.uk
Heinz:
i would say evidence that the rate hike cycle is over is positively piling up now....did you see today's durable goods debacle? (ex transportation that is). btw., Bob Bronson says capex growth in all industry sectors has peaked months ago (i.e., the growth rates have decelerated markedly). this is imo in anticipation of the consumer recession that will hit in '05.
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RodgerRafter:
We'll likely also see a flood of Asian goods moving toward Europe where the consumer's purchasing power is increasing, and away from the US where most consumers are getting SQUEEZED.
Mish:
We will huh?
That assumes unemployed aging European customers will go on a
spending spree. Data does not suggest that is likely, just as it does not suggest that Japan is about ready to go on a spending spree either.
Otherwise that was a nice piece.
Heinz:
exactly - once the US consumer retrenches (it has already begun imo - see latest report on consumer spending) , we're likely to see a synchronized global recession, led by the US. not a sudden European spending spree.
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Mish:
Novastar's bad news surprise
Rodger, you got a take on NFI? Message 20882064
RodgerRafter replies:
I hadn't been following them, but a quick glance at the numbers shows they are typical for the sector:
Novastar's Revenues
2001: $118 M
2002: $198 M
2003: $383 M
2004: $470 M for just the first 3 quarters.
Novastar's Earings:
2001: $27 M
2002: $49 M
2003: $175 M
2004: $91 M for just the first 3 quarters.
Earnings appear to have already peaked for most of the sector, even though revenues have been rising throughout. The actual peak has varied from Q4 '03 to Q3 '04 for the high risk loan companies I've looked at. I expect that has to do largely with increasing numbers of bad loans, although tougher competition for originations and the rise in the Fed Funds rate have to hurt too.
You don't get such extreme growth without taking on some extreme risk, especially in a sector where the competition is willing to create beasts like 125% equity loans and no paper loans. Since it usually takes awhile for loans to go bad (no matter how foolish the loans are), the peak period of defaults should probably come a few years after their peak period of new originations. Since revenues from new loans were rising faster than old loans were going bad, it made these companies look highly proftiable. Now we're probably just seeing the begining of a long downhill slide. Odds are, as more loans go bad, the risks inherent in their business will catch up with them and eventually take them down. Not that the execs really care about that. They get to keep the million dollar salaries they've been collecting as well as their options profits no matter what happens to shareholders:
finance.yahoo.com
Novastar mentioned difficulty unloading a "lower gain related to our latest securitization" which may be the result of fallout from Fannie's troubles. With Fannie furiously unloading mortgage backed securities on the market to get their reserves balances in order, it's harder for banks to unload new loans on the GSEs and harder for MBS sellers to find a market for their ticking time bombs.
Foreign holdings of Federal Agency debt (mostly FNM and FRE MBSs, I
believe) have risen by over $21.7 Billion from 11/11 to 12/16, which I suspect is a sign of the desperate need for buyers. That's up from a pace of about $750 million per week for the prior 45 weeks.
Heinz:
i also suspect that there is a lot of bad paper out there...supported by 'loan guarantees' underwritten by large institutions which allow normallly c-rated stuff to get investment grade ratings.
lots of stored up potential trouble. and i agree that the only reason the lenders have managed to look highly profitable is that they were able to expand new credit faster than old credit was defaulting on them - once the relationship turns around, a lot of the 'stored up' problems will become very real and immediate problems.
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Mish:
No time to verify this idea but is gold trading more to the british pound than the Euro right now?
Heinz:
could be, since the pound often leads the euro.
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Heinz:
ED's and bonds - a period of curve steepening may be ahead. i've noticed the speculative bearish sentiment on bonds has recently receded markedly, and that usually means a bigger correction is about to occur. since bonds and the short end have moved in opposite directions during the tightening cycle, it stands to reason that they will again move in opposite directions, at least for a while, when this cycle ends.
note that speculation is mounting that the BoE will be forced to lower rates at the next meeting. it is grounded in the suddenly wobbly looking housing bubble, i.e. it's a very reasonable expectation.
and without a doubt the UK cycle leads the US cycle.
Mish:
A bigger correction as in HIGHER treasury yields?
Heinz:
higher treasury yields coupled with lower yields at the short end - though i wouldn't look for a big move higher in long yields. just a temporary technical correction based on curve flattening positions being taken off. otoh, it depends of course also on whether certain technical levels remain unbreached. one mustn't forget the agencies and their portfolio duration balancing act - which exaggerates moves in both directions.
anyway, i've noticed the Rydex bond ratio has recently come down from 34 to about 21 - mostly on inflows into the long fund. such a big move in the ratio has been a good correction indicator in the recent past.
that said, the ratio is still so high as to preclude anything too dramatic imo...since the bond bears are sticking to their guns.
anyway, the recent CoTs also indicate a steepening is in the offing. i would expect the move down in short rates to be more dramatic than the move up in long ones....since the trigger should be perceptions that the economy is weakening. i've also noticed - anecdotally - that global fund managers remain wary of the govt. fixed income sector. today's debate on CNBC Europe between hedge fund managers on the '05 outlook showed this once again...('the lowest returns in '05 will come in the bond market' - so they said. they said the same thing last year.).
it's important to consider time frames: short term, lower short rates and slightly higher long rates, medium to longer term, lower rates across the maturity spectrum, imo.
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Mish:
German Feud over Gold Sales
Axel Weber, Bundesbank president, said yesterday the bank "did not see the necessity at this time to exercise its sales option. The reserves are part of the wealth of the people and have a high symbolic value." In comments likely to stir further tensions, he added: "Gold sales should not be an alternative to sustained budget consolidation [by the government]."
Message 20878904
Heinz:
well, Weber sure has my placet. it would be downright idiotic to follow in Brown's footsteps w.r.t. gold. why would one give up ownership of the ultimate means of payment?
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Mish:
Copper Near 2-Wk High After Rise on Stockpiles, Chinese Demand
Dec. 22 (Bloomberg) -- Copper futures in New York traded near a two-week high as inventories fell to a 14-year low and imports to China, the world's biggest user, rose last month from October.
Yesterday, stockpiles of the metal in London Metal Exchange- approved warehouses fell 3.1 percent to 52,650 metric tons, the lowest since July 1990.
Copper for delivery in three months on the London Metal Exchange was bid at $3,122 a metric ton and offered at $3,129 at 12:05 p.m. Sydney time, compared with yesterday's close of $3,090. Yesterday, the metal rose 0.4 percent to its highest since Dec. 1.
bloomberg.com
Heinz:
China's crude oil demand also bounced back big last month. looks like the Chinese used the corrections in various commodity prices to stock up.
this also indicates that China's boom may still be more durable than generally thought (not sure if you've followed the debate on kitco in March/April, where i argued that the China doomsayers were way too early).
one of these days China is going to stumble...and create a buying opportunity. but who really knows when? i sure don't - i only know that infrastructure build-out booms in emerging capitalist economies can be quite persistent (one only needs to look at the post WW2 rise from the ashes of Japan and Korea's post Korea war boom....). not to forget, the Olympics....lots of stimulus in the works from that event. still, China has no doubt experienced a lot of malinvestment while money supply grew at a 20 - 25% annual pace...lots of business activities that will one day be revealed as inherently unprofitable.
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Mish:
why would the BOE be watching this?
bankofengland.co.uk
Heinz:
my guess: on the theory that the markets know more than they do. they probably reason that potential dislocations can be spotted early on in the highly sensitive derivatives instruments.
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Mish:
Is this news of any relevance?
Bank of China is approved to launch individual gold trading Message 20878461
Heinz:
not really, since it's been known for some time. however, it is to be expected that China's gold offtake will increase markedly in coming years anyhow.
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Mish:
It Can't Happen Here
house.gov
Heinz:
Ron Paul is of course 100% correct here, but it's like pissing against the wind. the fascists rule the roost, and if for some reason they have to retreat from a position, rest assurred that another convenient event will put the wind back at their sails. if i have a disagreement it's that declining material well-being makes this not less, but rather MORE likely.
as an aside, everything that's happening now has been planned long ago. the weighty tome which they misnamed the "Patriot act" MUST have been waiting in a drawer for the right moment to be pulled out. it is not otherwise explicable that several hundred pages of through and through tyrannical fascist legislation that those that voted on it never even had a chance to READ, much less ponder, could be ready for deployment so quickly.
in other words, the path we're on has been predetermined by our rulers at a time when the neo-conservative yearning for a 'new Pearl Harbor' was but a distant dream. it should be resisted, but resistance will likely be futile.
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Mish:
Is the Dollar Really Overvalued?
As the size of the U.S. current account deficit gradually receives more attention, it has become an article of faith that the U.S. dollar is overvalued. Not so fast. By John P. Hussman, Ph.D. hussmanfunds.com
check out his piece in 2000 hussmanfunds.com
Excellent work?
Sure looks like it.
What do you think?
Heinz:
very good stuff - and note, Hussman also mentions that a current account deficit , PER SE, is NOT a reason to expect a currency to weaken.
(i would however add that it adds one of the preconditions for currency weakness in the long run). he doesn't say it outright, but an important point is HOW MUCH OF it is created, relative to new currency created elsewhere. note also, while Hussman contends that the dollar isn't really overvalued relative to its PPP and rate differentials , he also mentions that he would NOT bet against a continuation of the trend at this point in time. i have a hunch that he's right about that, even though a corrective rally in the dollar seems likely short term.
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