By allowing their currencies to strengthen, Asian countries are attempting to reduce the cost of importing coal, iron ore and wheat, ingredients essential to their booming economies. The risk is that the goods they produce may become too expensive. In China, consumer prices rose 6.5 percent in August, the most since 1997. Singapore consumer prices hit a 12-year high in August, and India's inflation rate this year reached the highest since 2005.
Asian central banks are finding that raising interest rates and selling debt aren't enough to soak up the cash that generates higher wages and fuels inflation. The People's Bank of China increased rates five times this year, while the Reserve Bank of India has boosted its target seven times in two years.
Currencies in Asia are rising so fast that manufacturers in Asia are demanding reassurances from policy makers that their exports will remain competitive. India's export growth slowed to an average 14.4 percent in the first eight months of this year, compared with 22.4 percent in the same period in 2006.
Asian central banks that want faster appreciation in their currencies are getting some help from international investors, who are pumping money back into emerging markets after pulling away in July and August. Stock market indexes in India, China, the Philippines, Indonesia and Singapore rose to records in the last month.
-Subir
Sunday, October 14, 2007
The Big Bank Bail Out
In a move reminiscent of the bail out of Long Term Capital Management in the late nineties, a group of large banks led by Citigroup, Bank of America, and JP Morgan have been in discussions to financially back approx. $100 billion in troubled investments tied to subprime mortgages. The concern is that "bank-affiliated funds will be forced to unload billions of dollars in MBS" which would in turn cause auction sales which would further drive down the price of these securities. The bigger fear is that after banks sustain this hit, they will be less inclined to approve loans to homeowners and businesses...further damaging the economy.
Many banks have created structured investment vehicles (SIV), which buy long term higher yielding long term debt, and issue short term debt at low rates because of their high credit rating. However, as the value of subprime has fallen, so has the credit quality of these vehicles. This has made it increasingly difficult for SIVs to roll their debt (issue new debt to redeem maturing debt). The plan ... which is tentatively named "Master-Liquidity Enhancement Conduit" (sounds like a physics experiment) would create a fund backed by the banks to issue short-term debt while also buying assets currently held by the SIVs. This superconduit would be financially backed by the big banks, and thus reassure the risk-averse investors that the SIVs initially attracted.
-JK
Many banks have created structured investment vehicles (SIV), which buy long term higher yielding long term debt, and issue short term debt at low rates because of their high credit rating. However, as the value of subprime has fallen, so has the credit quality of these vehicles. This has made it increasingly difficult for SIVs to roll their debt (issue new debt to redeem maturing debt). The plan ... which is tentatively named "Master-Liquidity Enhancement Conduit" (sounds like a physics experiment) would create a fund backed by the banks to issue short-term debt while also buying assets currently held by the SIVs. This superconduit would be financially backed by the big banks, and thus reassure the risk-averse investors that the SIVs initially attracted.
-JK
Wednesday, October 10, 2007
Get Ready to Read Between the Fed's Lines
Investors are evenly divided over whether Federal Reserve officials will cut interest rates again later this month or stand pat after September's cut.
By the end of the week, we'll all have a better idea of how Fed officials have been thinking. Minutes from the Fed's September meeting -- when it cut its target federal-funds rate by a half percentage point to 4.75% -- and from its emergency August conference call are due.
Money is flowing more easily through the credit markets and the September employment report makes the situation look much less scary.
If the minutes show the Fed was dwelling on markets and the August jobs report, investors might infer officials are more at ease now.
In the end, investors will have to decide whether they prefer an economy that is so weak the Fed feels compelled to cut rates again, or an economy that's strong enough to make officials feel comfortable standing pat.
-Subir
Banks selling debt for cheap
As the credit markets seized up over the summer, the private equity firms that were in high gear ran into troubled waters. Gone was the buyout shops' access to cheap loans.
Gone, too, even more suddenly, was investor demand for the loans -- and the price for them fell in step. That left Wall Street banks holding some $400 billion in debt they had promised as financing for purchases private-equity firms had in the works globally.
With the economy slowing and profits weakening, the banks could be stuck holding these hundreds of billions of dollars of loans for months to come -- a big risk
After the Fed rate, the banks have been able to sell off a portion of those debts; examples include $26.4 billion for Kohlberg Kravis Roberts & Co.'s buyout of First Data Corp.
The sales haven't come easily -- or profitably. They have offered only the highest-quality portions of the debt for sale, and that at a loss. To accomplish that they agreed to sell the debt at 96 cents per dollar, locking in losses after their fees were figured into the deal.
The banks have also tried to convince investors by promising 60-day protection on price. Yet many hedge funds decided to sit on the sidelines, assuming that on day 61, when the guarantee expired, they could pick up the debt for less money in the secondary market.
-Subir
Gone, too, even more suddenly, was investor demand for the loans -- and the price for them fell in step. That left Wall Street banks holding some $400 billion in debt they had promised as financing for purchases private-equity firms had in the works globally.
With the economy slowing and profits weakening, the banks could be stuck holding these hundreds of billions of dollars of loans for months to come -- a big risk
After the Fed rate, the banks have been able to sell off a portion of those debts; examples include $26.4 billion for Kohlberg Kravis Roberts & Co.'s buyout of First Data Corp.
The sales haven't come easily -- or profitably. They have offered only the highest-quality portions of the debt for sale, and that at a loss. To accomplish that they agreed to sell the debt at 96 cents per dollar, locking in losses after their fees were figured into the deal.
The banks have also tried to convince investors by promising 60-day protection on price. Yet many hedge funds decided to sit on the sidelines, assuming that on day 61, when the guarantee expired, they could pick up the debt for less money in the secondary market.
-Subir
Tuesday, October 9, 2007
Why the Dollar Won't Regain Its Past Strength
The US Dollar has been declining like it did in 2005 but experts believe that it probably wouldn’t regain its past strength.
The dollar is declining becase the current account deficit is increasing. Broadly speaking, the deficit measures how much more the U.S. spends on goods and services from abroad than it earns on the goods and services it sells.
Increasing current account deficit, will force the US to borrow money from outside, by writing IOUs. Borrowing money from outside will decline the dollar.
What's different now is that the U.S. economy is looking weaker than many of its counterparts abroad. US productivity is declining as compared to the emerging markets. So now investing in the US (i.e. lend US money) is not that attractive
Hence dollar will become cheaper, and US interest rates will go up; reducing the delta of interest rates with the emerging markets
-Subir
The dollar is declining becase the current account deficit is increasing. Broadly speaking, the deficit measures how much more the U.S. spends on goods and services from abroad than it earns on the goods and services it sells.
Increasing current account deficit, will force the US to borrow money from outside, by writing IOUs. Borrowing money from outside will decline the dollar.
What's different now is that the U.S. economy is looking weaker than many of its counterparts abroad. US productivity is declining as compared to the emerging markets. So now investing in the US (i.e. lend US money) is not that attractive
Hence dollar will become cheaper, and US interest rates will go up; reducing the delta of interest rates with the emerging markets
-Subir
Monday, October 8, 2007
October 8, 2007 - AMR's Long-Trm Solution Needs to Gain Some Altitude
Investors should be cautious about AMR (American Airlines) stock despite its recent list in price. The world's largest airline by traffic is setting a slower recovery pace than its competitors. The CEO is adhering to long-term strategy that often eschews short-term, investor pleasing fixes. Now, investments to improve operations for the long haul, including better customer service and new aircraft interiors, are adding to the carrier's high costs. Most airline stocks have been hurt in recent months by soaring energy prices, but shares of MAR have been battered more than others.
Hedge Funds Playing With Valuation?
New research shows that many hedge funds may be "cherry-picking" certain securities in their client portfolios and valuing them at overly favorable prices to improve the performance of their funds. This is especially significant given the number of hedge funds in the marketplace and volatility in the market as of late. Investment managers are blowing up as of late. For example, Ellington Capital suspended withdrawals at the end of September on two of their funds due to the credit market crunch. Two funds at Bear Stearns Asset Management had to suspend activities in late July due to large losses on CDOs. This has caused a domino effect on the market (especially on structured finance products) as the assets from these funds are liquidated in open market auctions. Because of the mark-to-market accounting principle of trading securities, banks and brokers had to mark down their securities to the auction levels...causing huge losses in the broader market. However, hedge funds do not operate under the same scrutiny. Many are offshore entities and not registered with the SEC. However, the idea of hedge funds playing with valuation may be of no surprise. According to a couple academic researchers, "distorting returns is more feasible when the opportunity for exerting managerial discretion is higher". Yea. Duh.
-JK
-JK
Sunday, October 7, 2007
October 4, 2007 - 'Decoupling' Is a Popular Bet; That's the Rub
It's increasing clear that the U.S. isn't any longer the sole engine of global growth- that other economies have, in effect, decoupled from it. For U.S. investors looking to cut exposure to a weaker U.S. economy, the key is to find companies that benefit from global growth and avoid those that are domestically focused or have big exposures to the housing market. Strong global demand makes energy and basic-materials companies obvious between, particularly since oil and raw materials are good hedges against a weakening dollar. Industrial companies with big overseas sales, such as Boeing and Deere, also make sense, as do most technology firms. On the other side of the ledger, department stores, media companies, restaurants and other so-called consumer-discretionary companies could get hurt by a slowdown in the consumer spending at the same time that they see some of their costs driven higher by the global boom. Many regional banks and other financial companies are getting hit by mortgage troubles. Firms with exposure to housing are in the worst straits. There's a big hidden risk here. When so many investors place bets on the same idea - no matter how good it is - even the slightest bit of unexpected bad news can inflict widespread pain as everyone tires to unwind those trades.
Monday, October 1, 2007
October 1, 2007 - Stocks Rise, Through It All
Although the stock market ended with respectable gains, there was turbulence along the way, including a dive in August when credit woes drove major indexes more than 9% off records set in July. Oil prices hit an exchange record high and the dollar hit a low against the euro. The Dow Jones Industrial Average recovered to end the quarter up 487.01 points, or 3.6%, at 13895.63, ahead 11.5% this year. The Fed Res helped in Sept. with half percentage point cut in its target short-term interest rate, sending the Dow to its best month since May and the best Sept since 1997. There could be more bad news from the credit crunch. The economy is in transition, moving from slow expansion to what investors hope will be more robust output aided by further interest-rate cuts from the Fed. It could move from slow expansion to shrinkage as well.
October 1, 2007 - Why eBay, Amazon Shares Are Up
Wall Street is re-evaluating how to measure growth at eBay Inc. and Amazon.com - and the change is helping to send the stocks of both companies higher. For years, analysts and investors routinely looked to numbers such as total auction listings and new users to gauge whether eBay and Amazon were growth companies. But some on Wall Street now have begun emphasizing other measures such as revenue generated per Internet user, operating margins and overall revenue growth. That means some analysts now are comparing eBay and Amazon with brick-and-mortar retailers rather than high-technology concerns.
October 1, 2007 - Dollar Lists Exporters
If the dollar falls too far and too fast, it could spur a run-up in interest rates and shake the stock market - which would be bad for the economy. A rapidly falling dollar would raise the price of imports, stocking inflation and in an extreme case could prompt foreign investors to dump U.S. bonds, pushing their yields higher. But as long as the dollar declines at a gradual pace, most economist see it as a modest positive. Multi nationals have built factories all over the world to insulate themselves from changes in currency. The dollar, however, has drifted so low, that some companies are considering moving their production back into the US.
MONDAY OCTOBER 1ST 2007 - STOCKS STRENGTH VERSUS ECONOMIC REALITY
The stock market is usually a leading indicator of economic growth. With the market once again trending upward, there seems to be a disconnect with the economy. Reports on employment, sales, production and homes have been weaker then expected. Chances of a recession are not quite 50/50, but it is somewhere in the neighborhood. Housing is a small portion of GDP. It's effect on the economy, however, is critical. Residential investment damped GDP growth prior to 8 of the last 10 recessions. Investors seem to be banking on overseas economic strength. Exports account for more then 1/10th of GDP.
Sunday, September 30, 2007
FRIDAY SEPTEMBER 28TH 2007
FEARS OF STAGFLATION – Stagflation is the scary tandem of weak growth and soaring inflation. There hasn’t been serious stagflation, when inflation and unemployment hit double digits, since the 1970’s (oil-price shock) and early 1980’s (anticipated 9% per year consumer price inflation for 10 years). Rising commodity prices and an ailing dollar lead to concerns for inflation, while a housing downturn and slowing productivity growth lead to concerns of a recession.
IMPROVING BALANCE SHEETS DUE TO BOND MARKET MESS – Due to the falling prices of their corporate bonds, banks are generating profit from the falling value of their debt. Example. A $100 million bond was issued by a bank. The $100 million bond falls in value by $5 million (5%). The decline in the bond’s value means the bank’s liabilities fell by $5 million. This is equivalent to a gain that ends up on the income statement and boosts profits. This allows firms to book hundreds of millions of dollars in profit. These gains will only offer a slight respite from the overall market woes.
IMPROVING BALANCE SHEETS DUE TO BOND MARKET MESS – Due to the falling prices of their corporate bonds, banks are generating profit from the falling value of their debt. Example. A $100 million bond was issued by a bank. The $100 million bond falls in value by $5 million (5%). The decline in the bond’s value means the bank’s liabilities fell by $5 million. This is equivalent to a gain that ends up on the income statement and boosts profits. This allows firms to book hundreds of millions of dollars in profit. These gains will only offer a slight respite from the overall market woes.
WEDNESDAY SEPTEMBER 26TH 2007
HOUSING CHILL GROWS WORSE, BITES CONSUMERS – Home inventories soared to an 18-year high according to data released yesterday. The problems stem from an oversupply of homes and turmoil in the mortgage market. Home builders are divided on how drastically to cut prices to put a dent in supply. Hovnanian Enterprises Inc discounted certain homes up to 30%. D.R.Horton discounted homes up to 50%. Individual homeowners have been slower than builders to bring down their prices. Mortgage companies are scaling back their loans to people with poor credit, while increasing loans that can be insured by the Federal Housing Administration. The housing market is worrying consumers. Consumer confidence fell this month to its lowest level in two years. Consumer confidence dropped from 105.6 in august to 99.8 in September. The survey ended on September 18th, the day before the fed cut rates. Optimists believe that the cut in rates will help keep the economy out of recession.
BED BATH CAN GO BEYOND TAKEOVER TALK – Shares of BBBY have been volatile lately due to caution related to Bed Bath’s exposure to the housing meltdown and the potentially shaky customer. BBBY was considered a potential target, until the recent dry up in the leveraged buy-out market. Investors have been hurt as this speculation no longer serves as a boost to its share price. The avoidance of a take-over could be BBBY’s saving grace as many buy-outs are typically loaded up with debt. Bed bath and beyond has a solid balance sheet. The company should be in better position than its competitors to weather a downturn.
TECH STOCKS GET GIDDY - Tech companies are experiencing strong demand from outside of the US, especially the emerging markets (orders expanding at a rate in the upper teens). New technology is prompting an increase in read demand all along the tech food chain that will translate into stronger profits for a broad range of tech companies. The weakening dollar is a short-term positive (bigger profits for tech companies that earn as much as 50% of profits over-seas) as well as a long-term positive (more competitive prices win recurring business.) After bottoming at about 18 P/E, Tech stocks are now trading at a 19.5 P/E, about 1 pt lower then it was a year ago.
BED BATH CAN GO BEYOND TAKEOVER TALK – Shares of BBBY have been volatile lately due to caution related to Bed Bath’s exposure to the housing meltdown and the potentially shaky customer. BBBY was considered a potential target, until the recent dry up in the leveraged buy-out market. Investors have been hurt as this speculation no longer serves as a boost to its share price. The avoidance of a take-over could be BBBY’s saving grace as many buy-outs are typically loaded up with debt. Bed bath and beyond has a solid balance sheet. The company should be in better position than its competitors to weather a downturn.
TECH STOCKS GET GIDDY - Tech companies are experiencing strong demand from outside of the US, especially the emerging markets (orders expanding at a rate in the upper teens). New technology is prompting an increase in read demand all along the tech food chain that will translate into stronger profits for a broad range of tech companies. The weakening dollar is a short-term positive (bigger profits for tech companies that earn as much as 50% of profits over-seas) as well as a long-term positive (more competitive prices win recurring business.) After bottoming at about 18 P/E, Tech stocks are now trading at a 19.5 P/E, about 1 pt lower then it was a year ago.
MONDAY SEPTEMBER 24TH 2007
DERIVATIVES PREDICT MARKET- Credit-default swaps are contracts between two investors that transfer the risk of a company defaulting on its loans. Those who tracked this complex credit derivative through indexes (examples: Credit Derivatives Research Index, ABX Indexes) were able to see the summer's meltdown coming. This year, several indexes based on derivatives of high yield bonds, started selling off before indexes base on high yield bonds dropped. I.E. Moves in the derivatives foreshadowed the recent market drop. These derivatives are changing the way investors think. A downturn can reignite fears of a credit crunch.
POSSIBLE RATE INCREASE DUE TO INFLATION CONCERNS - Federal Reserve cut interest rates last week in order to address the risk of recession and a break down in credit markets. In doing so, the central bank revived the fear of inflation. Fed is walking a tight rope: if they cut rates too little - recession fears will return, if they cut rates too much - inflation could loom. Worries are spreading in the bond market that inflation may force the Fed to raise interest rates early next year (treasury-bond yields shot up last week). Inflationary pressures are evident in the pricing of gold, agricultural products, energy, and the dollar.
RECESSION PROOF PORTFOLIO - Expecting a bumpy road, investors are prepping portfolios by increasing exposure to the usual slump-resistant sectors: consumer staples, health care, and utilities. They are also increasing exposure to large cap companies with international exposure (global growth, decreasing dollar). Investors look for stable, steady-growth companies with an attractive free cash-flow yield (a measure of a company's cash-generating power), and good margins. Financial companies with mortgages on their books were typically recession proof because investors expected people to pay their mortgages even if they had to scrape together everything they had. Investors should be pickier this time around.
POSSIBLE RATE INCREASE DUE TO INFLATION CONCERNS - Federal Reserve cut interest rates last week in order to address the risk of recession and a break down in credit markets. In doing so, the central bank revived the fear of inflation. Fed is walking a tight rope: if they cut rates too little - recession fears will return, if they cut rates too much - inflation could loom. Worries are spreading in the bond market that inflation may force the Fed to raise interest rates early next year (treasury-bond yields shot up last week). Inflationary pressures are evident in the pricing of gold, agricultural products, energy, and the dollar.
RECESSION PROOF PORTFOLIO - Expecting a bumpy road, investors are prepping portfolios by increasing exposure to the usual slump-resistant sectors: consumer staples, health care, and utilities. They are also increasing exposure to large cap companies with international exposure (global growth, decreasing dollar). Investors look for stable, steady-growth companies with an attractive free cash-flow yield (a measure of a company's cash-generating power), and good margins. Financial companies with mortgages on their books were typically recession proof because investors expected people to pay their mortgages even if they had to scrape together everything they had. Investors should be pickier this time around.
FRIDAY SEPTEMBER 21ST 2007
INFLATION RELIEF IN ETHANOL - Price of ethanol soared to record levels (+ $4 a gallon) with increasing focus on production of alternative fuels. Corn is a key ingredient in ethanol. An increase in the price of corn not only increased the price of corn-based food products, it increased the price of meat and dairy products as well (corn is a primary animal feedstock). In recent months, Ethanol has dropped to $1.70 a gallon. Corn prices followed suit, down 25% of its high, possibly lending to a future relief in inflation.
GOLDMAN SACHS VERSUS BEAR STERNS – During a brutal third quarter in which mortgage markets and costly borrowing decreased revenue for big banks, Goldman Sachs reported its second best quarter performance ever (Shorted home loans and securities tied to them, 900 mill gain from the sale of a holding.) Bear Sterns, on the other hand, lost two-thirds of its profit from the same period last year (88% decline in fixed income revenue.)
GOLD TO 27-YEAR HIGH – The combination of a weaker dollar and increasing inflation fears lead to a run up in fold futures. Gold is frequently bought when the dollar sags, as a currency hedge. Traders believe gold is still trading off the 50 basis-point rate cut, which lead to fears on inflation.
GOLDMAN SACHS VERSUS BEAR STERNS – During a brutal third quarter in which mortgage markets and costly borrowing decreased revenue for big banks, Goldman Sachs reported its second best quarter performance ever (Shorted home loans and securities tied to them, 900 mill gain from the sale of a holding.) Bear Sterns, on the other hand, lost two-thirds of its profit from the same period last year (88% decline in fixed income revenue.)
GOLD TO 27-YEAR HIGH – The combination of a weaker dollar and increasing inflation fears lead to a run up in fold futures. Gold is frequently bought when the dollar sags, as a currency hedge. Traders believe gold is still trading off the 50 basis-point rate cut, which lead to fears on inflation.
THURSDAY SEPTEMBER 20TH 2007
WORLD ECONOMY in FLUX AS AMERICA DOWNSHIFTS - After 16 years during which the U.S. mainly borrowed and bought while much of the rest of the world lent and sold the global economy appears to be undergoing a fundamental shift. American exporters are finding eager overseas markets for the products. U.S. consumers are beginning to temper their free-spending ways as the housing boom turns to bust. China, the Middle East, central Europe and Africa are absorbing more of the world's imports. The result: Instead of depending as heavily on the U.S. for demand, the world economy could become more evenly balanced.
Fed Rate Cut Could Burn Goldman Later - Goldman is still the golden child of Wall Street's investment banks. Deutsche Bank analyst recommends buying Goldman's stock, citing its big presence in fast-growing China, among other things. J.P. Morgan analyst likes Goldman's highly diversified business. Goldman has $61 billion of short-term debt on its balance sheet, plus an additional $7.1 billion in longer-term debt that will have to be rolled over into 2008. Some are concerned that the Fed Reserve's rate cuts this week backfired and cause inflation to go higher, leading to a rise in Treasury bond rates. If T-bond yields keep rising, Goldman would have to refinance that debt at higher interest rates, a direct hit to its bottom line. In other words, Goldman may shine for now, but higher inflation could cause it to lose its luster next year.
Emerging Markets and Oil Bubble Up - Emerging markets might be the next bubble. Stock markets around the world rallied in response to the Fed's half-percentage-point cut on Tuesday, with shares in emerging markets posting the biggest gains. The rush into emerging-market stocks is in part because of a belief that the Fed's rate cut, as well as easier policy stances at the European Central Bank and the Bank of England, will end up bolstering fast-growing emerging market economies more than any others.
Fed Rate Cut Could Burn Goldman Later - Goldman is still the golden child of Wall Street's investment banks. Deutsche Bank analyst recommends buying Goldman's stock, citing its big presence in fast-growing China, among other things. J.P. Morgan analyst likes Goldman's highly diversified business. Goldman has $61 billion of short-term debt on its balance sheet, plus an additional $7.1 billion in longer-term debt that will have to be rolled over into 2008. Some are concerned that the Fed Reserve's rate cuts this week backfired and cause inflation to go higher, leading to a rise in Treasury bond rates. If T-bond yields keep rising, Goldman would have to refinance that debt at higher interest rates, a direct hit to its bottom line. In other words, Goldman may shine for now, but higher inflation could cause it to lose its luster next year.
Emerging Markets and Oil Bubble Up - Emerging markets might be the next bubble. Stock markets around the world rallied in response to the Fed's half-percentage-point cut on Tuesday, with shares in emerging markets posting the biggest gains. The rush into emerging-market stocks is in part because of a belief that the Fed's rate cut, as well as easier policy stances at the European Central Bank and the Bank of England, will end up bolstering fast-growing emerging market economies more than any others.
WEDNESDAY SEPTEMBER 19TH 2007
Fed Cut Aims to Contain Damage - Stocks soar as Bernanke tackles credit crunch with half-point move. Federal Reserve Chairman moved aggressively to stop the spreading credit crunch from sinking the nation's economy with a surprising half-percentage-point cut in interest rates, casting aside for now worries about appearing to bail out investors.
Inflation Phobic Breathe Easier For the Moment - When the Fed cut rates by .5 point, it cautioned that "some inflation risks still remain." Some investors concluded that not only did the risks remain, they'd just gotten worse. Long-term bond investors consider inflation their biggest enemy because it eats at returns. In a sign that investors sought protection from inflation, prices for 10-year Treasury inflation-protected securities, which compensate investors for rising consumer prices, rose. Typically, when the Fed starts cutting, inflation isn't high up on investor's worry list. But yesterday's cut came at a time of good global growth with many emerging market economies running, if anything, too hot.
Why Firms Like Smucker May Feel Pinch of Debt Crunch - Many companies invested in mortgage-backed securities since they seemed like a safe way to diversify some of its investments. The issue for investors now is how these companies determine the "fair" value of their mortgage-backed securities in the current environment, and whether they are telling the whole story about how easily these assets can be liquidated - and for how much. When the credit market is liquid, determining the fair value of mortgage-backed securities can be easy, since there is an abundance of bid and offer quotes. But when things are tight, as they are for certain mortgage-related debt securities now, assessing fair value is difficult because there are far fewer buyers than sellers.
Inflation Phobic Breathe Easier For the Moment - When the Fed cut rates by .5 point, it cautioned that "some inflation risks still remain." Some investors concluded that not only did the risks remain, they'd just gotten worse. Long-term bond investors consider inflation their biggest enemy because it eats at returns. In a sign that investors sought protection from inflation, prices for 10-year Treasury inflation-protected securities, which compensate investors for rising consumer prices, rose. Typically, when the Fed starts cutting, inflation isn't high up on investor's worry list. But yesterday's cut came at a time of good global growth with many emerging market economies running, if anything, too hot.
Why Firms Like Smucker May Feel Pinch of Debt Crunch - Many companies invested in mortgage-backed securities since they seemed like a safe way to diversify some of its investments. The issue for investors now is how these companies determine the "fair" value of their mortgage-backed securities in the current environment, and whether they are telling the whole story about how easily these assets can be liquidated - and for how much. When the credit market is liquid, determining the fair value of mortgage-backed securities can be easy, since there is an abundance of bid and offer quotes. But when things are tight, as they are for certain mortgage-related debt securities now, assessing fair value is difficult because there are far fewer buyers than sellers.
TUESDAY SEPTEMBER 18TH 2007
SURPRISES LOOM REGARDLESS OF FED’S MOVE - Fed is expected to lower target rate for overnight loans between banks by .25 -.5 point. If it cuts by .25 point, some investors will think it is behind the curve. If it cuts by .5 point, some may worry that things are worse than they look.
YIELD CURVE IS BANKS’ SILVER LINING - The yield curve is the difference between short-term and long-term interest rates on Treasury. The yield curve matters for the bottom line of financial companies, especially banks. They can borrow or take in deposits at lower short-term rates and lend that money out long term at a higher rate and pocket the difference. For banks, the greater the spread between short and long rates, the better. When the curve is "flat", where long term and short term rates are similar - there is little profit. In anticipation of the Fed's rate cut, the yields on the Treasury two-year note and 10-year note have reached their widest gap since April 2005. Of course, snapping up bank stocks right now runs counter to widespread concerns about the near-term impact that mortgage-lending and other credit market woes will have on the bottom line of the banks. But some say that is what makes this a buying opportunity.
YIELD CURVE IS BANKS’ SILVER LINING - The yield curve is the difference between short-term and long-term interest rates on Treasury. The yield curve matters for the bottom line of financial companies, especially banks. They can borrow or take in deposits at lower short-term rates and lend that money out long term at a higher rate and pocket the difference. For banks, the greater the spread between short and long rates, the better. When the curve is "flat", where long term and short term rates are similar - there is little profit. In anticipation of the Fed's rate cut, the yields on the Treasury two-year note and 10-year note have reached their widest gap since April 2005. Of course, snapping up bank stocks right now runs counter to widespread concerns about the near-term impact that mortgage-lending and other credit market woes will have on the bottom line of the banks. But some say that is what makes this a buying opportunity.
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