As Krugman stated falling home prices lead to the feared phenomenon of “debt deflation.”
Monday, October 27, 2008
Friday, October 24, 2008
The next day (or there will not be one?) by Ektoras
The market is crashing.. What did you expect? At this moment there are many reasons for the markets to collapse. May be we don’t want to realize it but it is just right in front of us. The real economy will suffer. The next thing that one should expect now is that debt coming from shipping companies will not be repaid and that banks that are heavily exposed to the emerging markets, and do not have a well established network, will face major loses.
Thursday, October 23, 2008
Comment By Ektoras
A good friend whose opinion I respect wrote a comment that deserves space in the front page.
The CDO unwind waiting to happen (Bloomberg)
The CDO unwind waiting to happen
Are the days of CDO carnage behind us?
Apparently not. Bloomberg reported on Wednesday:
Oct. 22 (Bloomberg) — Investors are taking losses of up to 90 percent in the $1.2 trillion market for collateralized debt obligations tied to corporate credit as the failures of Lehman Brothers Holdings Inc. and Icelandic banks send shockwaves through the global financial system.
The article is referring to synthetic CDOs: that is, CDOs which are not backed by tangible collateral (RMBS, CMBS, for example) but CDS contracts which reference some form of collateral.
In this case, CDS on corporations.
All of which may sound dreadfully esoteric. Until you ratchet up the numbers. On Friday last week, Barclays analyst Puneet Sharma put out a report on a possible synthetic CDO unwind, and what can be expected to happen to the market as we move through a recession in the coming months.
In graph form, here’s what would happen to the ratings on prime and high-grade tranches of the trillion dollar synthetic CDO market:
It can get worse (FT Alphaville)
It can get worse
Granted, this was written by UBS’s Jeffrey Palma on Oct. 21, and things have deteriorated since then.
Year to date, global equities are down 36.2%, on a total return basis, the worst year ever since MSCI World began in 1970. Before that, 1974 was the worst returning year, when equities fell 24.5%.
At today’s prices the MSCI World is back to its September 2003 levels, erasing 61 months of gains so far. This is more than the gains erased at any other time since the 1970s. In 1990 the index erased 24 months of gains, and then a further 15 months of gains in 1992. Between 2000-2003 the index erased its prior 53 months of gains.
Peak to trough things have been worse in the past. From their October 2007 peak, global equities are now down 43% in price terms compared to 48% between 2000 and 2003.
On the plus side, that means equities are trading on an average price/earnings ratio of 11.1 — the cheapest PE since 1982, according to UBS. FT Alphaville notes, however, that might not be so good when you consider the stocks are at their lowest level since before 1970 (as above).
On the other hand, over 50 per cent of companies are now offering dividend yields above 3 per cent — greater than the long-term average of 2.8 per cent since 1974, UBS says.
Opportunity to buy then? Not quite.
There’s still the coming recession.
In previous earnings cycles, global earnings have fallen 30-40% from their peak. So far EPS is down around 15%, suggesting earnings weakness is likely to persist well in to next year.
What’s worse is that while analysts are just starting to revise their earnings estimates for 2008 (almost over anyway) downwards, 2009 and 2010 still have a long way to go.
… while 2008 numbers have come down significantly, 2009 and 2010 estimates still look too lofty. As a result, forecasts for growth in these years will need to fall sharply.
What’s an investor to do then? Palma has the answer:
Stay defensive. Against an uncertain landscape we retain our defensive sector allocation, as investors continue to manage cyclical risk. Our largest overweights are in Consumer Staples and Telecoms as we encourage investors to search for yield and companies with stable earnings and less relative downgrade risk. These sectors are trading at a premium to the market because of these characteristics, but we don’t expect a reversal while uncertainty prevails.
Not surprising then that UBS have Campbell’s Soup on their preferred stock list.
Wednesday, October 22, 2008
Argentina Default Looms as Pension Funds Seizure Roils Markets (Bloomberg)
Argentina Default Looms as Pension Funds Seizure Roils Markets
Tuesday, October 21, 2008
Overnight Dollar Libor Declines to 1.28 Percent (BLOOMBERG)
Overnight Dollar Libor Declines to 1.28 Percent, BBA Says
European weather map (FT)
European weather map
Published: October 20 2008 21:35 | Last updated: October 20 2008 21:35
Stormy conditions prevail across Europe’s economies after the arrival of a full-blown banking sector crisis this month sent confidence plummeting and threatened widespread-economic damage.
The FT’s latest European economic “weather map” shows the extent of the deterioration since July and April. In July the continent’s economies had largely avoided a credit crunch but were being hit by sudden and steep rises in energy prices, compounded by the effects of a strong euro. In October, inflation is ebbing and the euro has softened.
The weather symbols were compiled by Ralph Atkins, Frankfurt bureau chief, and draw from official data as well as his own analysis. Click on a period to see the forecast.
Valuations Need To Fall Further for a Sustainable Rally
Last week we discussed Robert Shiller’s S&P500 trailing 10-year price earnings ratio that has averaged 16.3 since 1881 and the fact that it had dropped to 15 as of October 10th. While we saw prices increase last week and a rise in P/Es, what does the longer-term future hold?
In our next chart, we show annual trailing 10-year P/Es from 1920 to August 2008 using Dr. Shiller’s data. As we see from this chart, every major recession has resulted in P/Es falling below 10 for an extended period of time - lasting decades, not years - typical of secular bear markets. Click to enlarge:
At 15 last week, the P/E was back to just below the long-term average, but this was a daily drop, not an annual P/E. It will take many more months (possibly a year or more) to get back below 15 on an annual basis, meaning we probably won’t see this occurring till 2009 or even 2010.
After that, it could take a few more years to get back to single digits like we had during the last major recession in 1981-1982. In other words, markets and economies will need a long rest with P/Es below 10 before they will be able to mount the next sustainable bull market. A similar situation occurred during the Great Depression into the early 1950s, as we see from the chart above.
Could we get another cyclical bull market rally lasting a few weeks, months or even years as we saw between 2003 and 2007? Very possibly, but as we learned, more often such rallies are short-term and often end abruptly and rather unexpectedly. There are also the raft of fundamental financial challenges facing a sustained U.S. economic recovery like the crushing levels of debt, rapidly deflating derivatives and housing bubbles, falling Treasury sales and mounting government deficit as a result of more than $2 trillion in bailouts so far.
But that doesn’t mean you can’t make money trading the powerful reactive rallies embedded in every secular bear market. This is a trader’s market where it's important to set tight stops and take profits off the table regularly, not a time to buy and hold for the long-term, as the so-called pundits would have us believe, if we are in a true secular bear market.
Lex (FT) on The crunch stole Christmas
The crunch stole Christmas
Published: October 20 2008 15:04 | Last updated: October 20 2008 20:55
If investors are to be believed, Santa’s sack will be light this year. Share prices of Mattel and Hasbro, the two big US toymakers, have fallen by a third since August. Third-quarter numbers released on Monday from both manufacturers prompted downgrades to earnings expectations in spite of solid sets of topline growth. Has Christmas been cancelled?
Some caution is natural. After 15 years of declining prices for toys, 2006 and 2007 were notable for rises in average product prices. New mechanisation and computerisation techniques had allowed the creation of must-have robotic playthings, handing their manufacturers a rare degree of pricing power. Yet with consumers retrenching from all discretionary spending, it is hard to see too many parents forking out for Hasbro’s $180 FurReal Friends Biscuit animatronic puppy, or Mattel’s $60 Elmo dolls.
Christmas is always a nervy time. Shares in the toymakers tend to perform best in the first half of the year, when the fourth quarter turns out not to have been so bad as feared, and the following year’s line-up starts to prompt excitement. Toys have historically proved relatively recession proof, thanks to parents’ perennial desire to see happy faces on Christmas morning. More than half of Hasbro’s products sell for less than $20; more than three-quarters of Mattel’s for less than $25. Retailers know the pull of toys and discount hard-to-lure customers – Wal-Mart has announced a top 10 for $10 deal.
Currency headwinds lie in wait next year, and ambitions to make mid-teen margins are likely to stay long-term goals for now. But demographics, international growth and well established brands remain on the toymakers’ side, suggesting a future of steady, if unexciting growth. With Mattel now trading on a lowly 10 times prospective earnings, the spirit of Scrooge may have gone too far.
Monday, October 20, 2008
Libor fixes: credit and phase transitions
Libor fixes: credit and phase transitions
From the BBA:
LIBOR OVERNIGHT STERLING RATES FIX AT 4.76875% VS 4.68750%
LIBOR OVERNIGHT DOLLAR RATES FIX AT 1.51250% VS 1.66875%
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