End of Week Review for February 2nd, 2008
Saturday, February 2nd, 2008Occasionally it’s nice to be proven right!
One benefit of a cheap US Dollar is that it inspires foreign investment in manufacturing in the USA. Tourism is flourishing, and exports are improving, helping soften the effects of this recessionary economy. Many governments and companies stuck with the US currency, generally arising out of heavy exports to the US, are taking this opportunity to use the US currency and convert it into hard assets such as factories, companies and producing properties. These buyers know full well, that they will eventually turn their investments into profits. Some have already turned their investments into profits with cash-flow much greater than the negative cash-flow seen, as the US Dollar declines in value and the interest earned in US Government paper declines with it. Not only are factories and companies being purchased, but farmland, which produces various crops. Naturally, anybody with a half a brain knows that as food, agricultural commodities, prices increase, the farmland also appreciates in value, this combination of positives creates a cash flow in US Dollars. Foreign holders of excess US Dollars from trade and business can invest in T-Bills, or invest those dollars and buy a piece of America, which would you do? Michigan is a cheap state to buy. The real-estate is cheap, the factories are cheap and the unemployment rate is high with lots of motivated workers.
In today’s world, it isn’t necessary to raise a gun to take control of a country, just buy it!
As to the suggested government’s band aid on an economic arterial mortgage bleed, it won’t work. The patient will die if the hemorrhaging isn’t stopped. Anything that the government tinkers with, generally fails, look at the ethanol scam, taking food out of our mouths to inefficiently produce a fuel which is inferior to other bio-fuels. Think about sugar based ethanol, rather than taxing each gallon of sugar-based ethanol brought into this country give a tax credit for this intelligent use of a cheap fuel. What about palm oil or other bio-fuels? Are we being lobby bullied into corn?
From January 6, 2008
Are we all ready?…..This week is the beginning of 4th quarter earnings season with the earnings of Alcoa to be release on Wednesday, January 9th. Naturally, we are all waiting with baited breath for the earnings of the financials, which will be released before the January options expire.
The FOMC will be under a ton of pressure to cut rates at their next confab, which will be a two-day meeting on January 29 and 30th. Although the FOMC remains concerned about inflation, it would appear that the economic slowdown will be of primary concern to this group. Lower interest rates will, naturally, help the financial institutions who make money on the spreads between their borrowing costs and the lending charges, however; will they, these institutions, be willing to lend, and at what cost to the borrower? Would you lend funds, and how much of penalty would you charge the borrower, for the risk you are taking on that loan? The interest rate gougers will be out in full force, borrowing cheap and lending expensive so, how will this help the mortgage market and housing? Frankly, it won’t help much at all, but at least the financial institutions will make money on the spread.
We are beginning to get a first glimpse of some of the higher priced commercial interest rate pressures. Still, the NYC commercial and residential real-estate market is a very tight market with low vacancy rates. In the January 6th article published by the New York Times, HARRY MACKLOWE’S $6.4 BILLION BILL written by Charles V. Bagli and Terry Pristin, we are allowed a bird’s-eye view at one of New York’s top ranked developers and, the financial mess he finds himself in today. His loans are based on fantasy, speaking of $100 a square foot rent when then market actually was at $55 to $59 a foot. This massaging of numbers reminds us of the mid-1980’s tax shelters, remember the aggressive tax write offs created in part to the accrual of debt, which naturally would be covered by rents that are going up, and, who cares if is a write-off anyway! We lived through this era where the IRS disallowed the write-offs and the accruals came due to slap the faces of the investors who finally sold the properties for pennies on the dollar. Although this article talks about commercial property, we remind you that many exotic mortgages, generally in the millions, are beginning to balloon……or, come due fairly soon and will carry into the future for about 5 years.
From December 9, 2007
“As the world turns” something sinister is brewing under the surface of the market. This little talked about problem could send the markets reeling, and the Fed floundering without sufficient ammunition to ward off a major problem. Might we remind you that the FOMC (Federal Open Market Committee) can only tinker with short term rates, not long term rates. Further, should a catastrophe befall this market the FOMC will be shooting rubber bullets. So what is this problem? The major problem that we see (there are many that we see but this one takes the lead) is the possible downgrading of MBIA and AMBAC by Moody’s investment research.
MBIA and AMBAC are two of the leading insurers of municipal bonds. Should they be found to be light of capital, this could send a shudder through the bond desks that could only be classified as a bond tsunami. This is no small problem. As insurers, there is a need for these groups to have capital “on hand” at all times. Should this amount become inadequate or perceived as such, the insurance these outfits render would be without enough funds to cover losses. Moody’s, a rating agency, will likely reduce their ratings on this pair and thus cause shudders thought the bond world. Remember, municipal bonds pay for insurance on some of their issues so that they can sell the issue and pay lower interest rates and obtain an AAA rating. Without the insurance it is possible that these bonds might have much lower ratings and, perhaps low enough ratings that they will no longer be allowed in some funds. This could put further pressure on an already shaky bond market and force liquidations of some of these bonds, not because they are bad but because they might no longer be allowed in the fund. If the insuring agency is viewed as unable to payout on a failure, then the rating of that bond and all other bonds insured by that agency will be called into question. MBIA and AMBAC insure 50% of municipals as well as other bonds. Get the picture?
And finally—two links on the continuing mortgage backed securities meltdown.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aaK_r.bfo7TI&refer=news