Went long equities in mid-April, 100% of portfolio to ride this bear market rally. Up xxx% last two months.
2Q almost over, 20/50/200 EMA and SMA moving average supports ALL broken on S&P 500, second leg down to come?
I'm thinking this move down is precipitated by market's false belief mortgage crisis is over: the reason median housing prices are actually increasing is contagion moving upmarket to alt-a, prime, jumbo market forcing sales in those higher priced categories from real economic distress, not outright fraud (as occurred in subprime markets). Read Mr. Mortgage.
Sold portfolio today, and went short equities, short oil, long vix today. We'll see...we are at a key juncture..this week's action will be critical to how the market plays out in 3Q
Monday, June 22, 2009
Thursday, May 28, 2009
Improvement in Home Inventory Levels Marks a Bottom?
"Sales increased 0.3 percent to an annual pace of 352,000, lower than forecast, after a 351,000 rate in March, the Commerce Department said today in Washington. The median sales price
What's been worked through the system:
decreased 15 percent from April 2008, while the number of homes on the market fell to the lowest level in almost eight years.
Near record-low mortgage rates, bargain pricing and tax credits for first-time buyers are helping to put a floor under purchases after almost four years of declines. Still, rising unemployment and tight credit indicate sales will not rebound much in coming months, even as the worst recession in half a century begins to ease.
“The good news is probably the continued improvement in inventory levels,” said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. “We’ll take the improvement in the new-home market as a sign we’re getting closer to the bottom and we might see some stability in the housing market by the summer.”"
I see stories like this printed constantly in the financial media, constantly touting improved inventory levels marking the bottom and the worst being behind us in terms of the housing market. Sorry, that is absolutely the wrong conclusion. What is happening is that subprime mortgage resets have worked their way through the system and the subprime mortgage borrowers have long-since defaulted, with the houses at the low end of the market having worked their way through the system. What will happen now, and what we are starting to see is a huge uptick in Alt-A and Prime mortgage defaults.
Now, while the default rate is lower % wise for these two segments, the total size of these types of mortgage outstanding is much much greater than subprime, and hence the wave of defaults, in dollar amount, will be as large if not larger than the subprime wave we just endured. Since these buyers tend to buy higher priced homes, the median sale price will undoubtedly increase as the distressed sale cancer moves upmarket, however the price Y-o-Y on the properties for sale will tank. It will take 2-3 years for this wave to work through the system.
NY Times has the data which is depicting this: http://www.nytimes.com/imagepages/2009/05/25/business/economy/25foreclose.grfx.ready.htm
Subprime defaults rose rapidly in 2006-2007, plateauing in 2008 while ALT-A defaults began to rise rapidly in 2007 continuing through today, and prime mortgages defaults began rising in earnest in 2008. Already the total dollar amount of ALT-A and Prime mortgages defaults individually exceed the total amount of defaulted subprime mortgages ($250B), and we are only partially through the ALT-A default wave and just beginning the prime default wave. This default wave is being caused less by fraud (though still a significant part of the ALT-A default wave) and more by macroeconomic factors (job losses mostly).
Mortgage issuance:
2003:
$2,445B in Conforming (62% of 2003 issuance)
$ 631B in Jumbo's (16% of 2003 issuance)
$ 315B in HEL's ( 8% of 2003 issuance)
$ 79B in Alt-A ( 2% of 2003 issuance)
$ 237B in Subprime ( 6% of 2003 issuance)
$ 237 B in FHA/VA ( 6% of 2003 issuance)
2004:
$1,198B in Conforming (41% of 2004 issuance)
$ 526B in Jumbo's (18% of 2004 issuance)
$ 526B in HEL's (18% of 2004 issuance)
$ 204B in Alt-A ( 7% of 2004 issuance)
$ 321B in Subprime (11% of 2004 issuance)
$ 146B in FHA/VA ( 5% of 2004 issuance)
2005:
$1,092B in Conforming (35% of 2005 issuance)
$ 560B in Jumbo's (18% of 2005 issuance)
$ 374B in HEL's (12% of 2005 issuance)
$ 374B in Alt-A (12 of 2005 issuance)
$ 624B in Subprime (20% of 2005 issuance)
$ 94B in FHA/VA ( 3% of 2005 issuance)
2006 (Start of subprime default wave):
$983B in Conforming (33% of 2006 issuance)
$477B in Jumbo's (16% of 2006 issuance)
$417B in HEL's (14% of 2006 issuance)
$387B in Alt-A (13% of 2006 issuance)
$596B in Subprime (20% of 2006 issuance)
$ 90B in FHA/VA ( 3% of 2006 issuance)
2007 (Start of Alt-A default wave):
$1166B in Conforming (48% of 2007 issuance)
$340B in Jumbo's (14% of 2007 issuance)
$364B in HEL's (15% of 2007 issuance)
$267B in Alt-A (11% of 2007 issuance)
$194B in Subprime ( 8% of 2007 issuance)
$ 98B in FHA/VA ( 4% of 2007 issuance)
5 year totals:
$ 6,884B in Conforming (45% of 2003-2007 issuance)
$ 2,534B in Jumbo's (16% of 2003-2007 issuance)
$ 1,996B in HEL's (13% of 2003-2007 issuance)
$ 1,311B in Alt-A ( 9% of 2003-2007 issuance)
$ 1,972B in Subprime (13% of 2003-2007 issuance)
$ 665B in FHA/VA ( 4% of 2003-2007 issuance)
-------------------------------------------------------------
$15,362B total, $7T in Conforming, $3T in Jumbo's, $2T HEL, $1T Alt-A, $2T in Subprime
See http://www.growthology.org/photos/uncategorized/2008/07/11/litanhousing1.gif
There is a lot more pain to come in the housing market, except now it will be the better off and those with jumbo mortgages who are in trouble. Take an optimistic simple hypothetical.
What's just starting to hit the system:
Prime default rate (for ALL loans in this category):
(1.11% Q1 2008, 2.4% Q4 2008, 5% peak) vs. 2003-2007 issuance: $9,400B
What's just starting to hit the system:
HEL default rate (for ALL loans in this category):
(2.9% Q1 2008, 4.4% Q4 2008, 6% peak) vs. 2003-2007 issuance: $2,000B
What's partially worked through the system:
Alt-A default rate (for ALL loans in this category):
(5.2% Q1 2008, 9.1% Q4 2008, 12% peak) vs. 2003-2007 issuance: $1,300B
What's been worked through the system:
Subprime default rate (for ALL loans in this category):
(11% Q1 2008, 17% Q4 2008, 20% peak) vs. 2003-2007 issuance: $2,600B
Wednesday, May 27, 2009
Banks Aiming to Play Both Sides of the Coin
Banks Aiming to Play Both Sides of the Coin
I find it impossible to believe the Treasury didn't see this coming.
See the post from Tuesday, March 24, 2009 to get some idea of what the banks want to do.
Example: Bank A puts put up $3B of their capital (maybe some TARP funds? who knows, capital is fungible) into an off-balance vehicle (essentially a hedge fund) and receive $97B of government leverage to buy its OWN securities and loans from itself (i.e. overbid).
Their goal here is not to make a profit by purchasing the securities and loans at fair value, but rather, to DUMP the securities and loans into the off-balance sheet structure so they no longer have to take loss provisions. If the loan book turns out to be decent, they can re-absorb the off balance sheet vehicle.
$3 to DUMP $100 B of securities, what a swell deal!
I find it impossible to believe the Treasury didn't see this coming.
See the post from Tuesday, March 24, 2009 to get some idea of what the banks want to do.
Example: Bank A puts put up $3B of their capital (maybe some TARP funds? who knows, capital is fungible) into an off-balance vehicle (essentially a hedge fund) and receive $97B of government leverage to buy its OWN securities and loans from itself (i.e. overbid).
Their goal here is not to make a profit by purchasing the securities and loans at fair value, but rather, to DUMP the securities and loans into the off-balance sheet structure so they no longer have to take loss provisions. If the loan book turns out to be decent, they can re-absorb the off balance sheet vehicle.
$3 to DUMP $100 B of securities, what a swell deal!
Thursday, May 14, 2009
BrIC, not BRIC
An acronym thrown around recently:
BRIC countries are supposedly fast growing emerging economies that are somewhat independent of US driven demand and supposedly are going to become the dominant four economies by 2050:
Brazil
Russia
India
China
Russia does not belong in this group.
Its economy is extraordinarily hydrocarbon and metals export dependent, in fact, such a huge proportion of the economy is natural resource driven that even the UAE has a more diverse economic base. Its GDP imploded in the recent economic malaise, contracting a staggering 9.5% in q1.
In fact, its economic performance has been so horrific that a recent strategic blueprint released by the Kremlin and signed by President Medvedev listed the current resource export economic structure as a major threat to Russia's future.
Furthermore, its life expectancy is abysmal, its population is on the decline, it has decreasing business transparency, and it has decreasing rule of law.
BrIC, not BRIC. Russia should be categorized with natural resource dependent nations, such as Saudi Arabia and Venezuela, not multi-faceted economies such as Brazil, India, and China.
BRIC countries are supposedly fast growing emerging economies that are somewhat independent of US driven demand and supposedly are going to become the dominant four economies by 2050:
Brazil
Russia
India
China
Russia does not belong in this group.
Its economy is extraordinarily hydrocarbon and metals export dependent, in fact, such a huge proportion of the economy is natural resource driven that even the UAE has a more diverse economic base. Its GDP imploded in the recent economic malaise, contracting a staggering 9.5% in q1.
In fact, its economic performance has been so horrific that a recent strategic blueprint released by the Kremlin and signed by President Medvedev listed the current resource export economic structure as a major threat to Russia's future.
Furthermore, its life expectancy is abysmal, its population is on the decline, it has decreasing business transparency, and it has decreasing rule of law.
BrIC, not BRIC. Russia should be categorized with natural resource dependent nations, such as Saudi Arabia and Venezuela, not multi-faceted economies such as Brazil, India, and China.
Friday, May 8, 2009
Chavez Nationalizes Oil Services Companies Operating in Venezuela
In 2002 PDVSA's engineers and oil workers went on strike along with other unions as well as businesses to protest Chavez placing his men on the board of directors of PDVSA. In 2003 the Venezuelan NOC fired all PDVSA's striking engineers and oil workers and replaced them with Chavez cronies. In the immediate aftermath, oil production never recovered to the pre-strike value of 3 MM bbl/day and has continued its steady decline to 2.4 MM bbl/day.
Most of the oil in place in Venezuela is extra-heavy, sour (high in sulfur), and requires significant upgrading. Most of these upgrading facilities were joint ventures with international oil companies and the oil services companies were providing secondary recovery techniques to help stem the drop in Venezuelan production (Venezuela's field output is steadily degrading and require more complex secondary and tertiary extraction techniques to maintain output).
Firing the PDVSA engineers was disastrous enough, but now nationalizing the oil services companies who have been the only thing keeping production from imploding, that is an incredibly dangerous move on Chavez's part. I would gamble that Venezuelan output is going to be hindered significantly by his actions.
Monday, May 4, 2009
Tuesday, April 14, 2009
From the hall of Montezuma, to the shores of Tripoli?
From the Halls of Montezuma,
To the shores of Tripoli;
We fight our country's battles
In the air, on land, and sea;
First to fight for right and freedom
And to keep our honor clean;
We are proud to claim the title
Of United States Marines.
The US has dealt with African piracy once before, in the Barbary War at the very start of the 19th Century. We landed our Marines in Libya and destroyed Tripolitan cities. Unfortunately this approach will not work in Somalia in the present day without risking another Mogadishu, though it's being touted on Fox News.
A couple days ago I asked myself why isn't the US military utilizing killer-scout Predators and hunter-killer Reapers to deal with the Gulf of Aden Somali Pirate issue?
Deploying frigates, PT boats, amphibious assault ships (aka chopper carriers), destroyers, guided missile cruisers, even traditional aircraft carriers is more or less useless.
Why?
What is needed is situational awareness and instant strike capability stemming from the fact that the area that needs to be patrolled is the size of Texas (difficult to have constant situational awareness using traditional means with an area this size), and it is difficult to identify the pirate attack ships and motherships until an attack is under way (need instant strike capability).
The US has moved three assets there:
the USS Boxer, an amphibious assault ship (basically a huge chopper carrier)
the USS Bainbridge, a destroyer
the USS Hallyburton, a guided missile frigate
However, by the time any of these assets are aware of a developing situation or even if they become aware of an attack launched from one of these pirate motherships (these attacks are occurring over a hundred miles off the coast of Somalia) the fast attack pirate ships have already reached their targets and taken them over. Tomahawks are not suitable for destroying these small ships, and rarely are the US Naval assets aware of an attack underway until a ship is boarded. Short of dropping in a Navy SEAL team after a ship takeover, which would likely result in casualties, there is nothing to be done with the current tactical setup. The US Navy is designed to fight Russia and China, and ill equipped against insurgents or pirates (though Gates is attempting to turn that around).
What is needed is the use of the scout-killer/hunter-killer platform,designed for situational awareness, interdiction, and counter insurgent duties. The ship or base would launch and retrieve the Reapers and Predators. Possible ships are the older aircraft carriers set to be decommissioned in the next few years (might be overkill since these aircraft do not require catapult based launching), such as the USS Enterprise or USS Kitty Hawk, a converted tanker with escort, or the conversion of US use of Thumrai Air Base in Oman from refueling for B-1, C-130, and other aircraft to a launching point for interdiction Predator and Reaper aircraft.
The Predator and Reaper have over 24 hour loiter times, speeds of 150 and 250 mph, ranges of 2000 miles and 3000 miles, and can carry 4 hellfire and 14 hellfire air to ground missiles, respectively.
They can be controlled via Ku band satellite uplink for non line of sight control beyond 400 nm or to avoid radio jamming, or via C band radio uplink for line of sight control, and their hellfire missiles have a 5.5 mile operational range.
The Reapers and Predators can also be armed with guided munitions, such as GPS guided JDAM's, which might be useful for taking out the pirate motherships (but not accurate enough to take out the small attack vessels, which require the use of hellfires (which have been used numerous times to take out moving cars).
These aircraft are the ultimate in deadly persistence, think of them as instant air strikes. That is how they are being used in Iraq and Afghanistan. Merchant ship convoys, and mass patrols via ship have been proposed by the US and allies operating in the area to respond to the pirate threat, but they are ill suited for the task and would be much more costly than a couple squadrons of these craft.
What is needed is persistent situational awareness and instant interdiction capability at minimum cost and the Predator / Reaper setup provides just that. Destroyers and frigates, unless en masse, cannot provide pirate free shipping lanes. However, a squadron of Predators and Reapers in flight in the Gulf would easily be able to track all mothership vessels and obliterate any pirate attacks before they reached their targets.
Think about it, it costs $340 MM for an amphibious assault ship like the USS Boxer, $450 MM for Aegis Missile Destroyers like the USS Bainbridge, and at least $70 MM for guided missile frigates like the USS Hallyburton, all of which are totally unsuited for small craft interdiction.
A complete squadron of Reapers, consisting of 12 aircraft, the ground stations, and all other hardware runs $200 MM per squadron of 12 aircraft, while a Predator squadron runs $90 MM. For the cost of a single Aegis Destroyer, you could field a squadron of Reapers for long range interdiction (out to 1500 miles) and three squadrons of Predators (out to 1000 miles), using less fuel, fewer men, and putting no lives in harms way. You would have much much higher situational awareness and interdiction capability, assuming 3/4 of units are deployed at any given time that's 36 flying missile truck surveillance planes.
To the shores of Tripoli;
We fight our country's battles
In the air, on land, and sea;
First to fight for right and freedom
And to keep our honor clean;
We are proud to claim the title
Of United States Marines.
The US has dealt with African piracy once before, in the Barbary War at the very start of the 19th Century. We landed our Marines in Libya and destroyed Tripolitan cities. Unfortunately this approach will not work in Somalia in the present day without risking another Mogadishu, though it's being touted on Fox News.
A couple days ago I asked myself why isn't the US military utilizing killer-scout Predators and hunter-killer Reapers to deal with the Gulf of Aden Somali Pirate issue?
Deploying frigates, PT boats, amphibious assault ships (aka chopper carriers), destroyers, guided missile cruisers, even traditional aircraft carriers is more or less useless.
Why?
What is needed is situational awareness and instant strike capability stemming from the fact that the area that needs to be patrolled is the size of Texas (difficult to have constant situational awareness using traditional means with an area this size), and it is difficult to identify the pirate attack ships and motherships until an attack is under way (need instant strike capability).
The US has moved three assets there:
the USS Boxer, an amphibious assault ship (basically a huge chopper carrier)
the USS Bainbridge, a destroyer
the USS Hallyburton, a guided missile frigate
However, by the time any of these assets are aware of a developing situation or even if they become aware of an attack launched from one of these pirate motherships (these attacks are occurring over a hundred miles off the coast of Somalia) the fast attack pirate ships have already reached their targets and taken them over. Tomahawks are not suitable for destroying these small ships, and rarely are the US Naval assets aware of an attack underway until a ship is boarded. Short of dropping in a Navy SEAL team after a ship takeover, which would likely result in casualties, there is nothing to be done with the current tactical setup. The US Navy is designed to fight Russia and China, and ill equipped against insurgents or pirates (though Gates is attempting to turn that around).
What is needed is the use of the scout-killer/hunter-killer platform,designed for situational awareness, interdiction, and counter insurgent duties. The ship or base would launch and retrieve the Reapers and Predators. Possible ships are the older aircraft carriers set to be decommissioned in the next few years (might be overkill since these aircraft do not require catapult based launching), such as the USS Enterprise or USS Kitty Hawk, a converted tanker with escort, or the conversion of US use of Thumrai Air Base in Oman from refueling for B-1, C-130, and other aircraft to a launching point for interdiction Predator and Reaper aircraft.
The Predator and Reaper have over 24 hour loiter times, speeds of 150 and 250 mph, ranges of 2000 miles and 3000 miles, and can carry 4 hellfire and 14 hellfire air to ground missiles, respectively.
They can be controlled via Ku band satellite uplink for non line of sight control beyond 400 nm or to avoid radio jamming, or via C band radio uplink for line of sight control, and their hellfire missiles have a 5.5 mile operational range.
The Reapers and Predators can also be armed with guided munitions, such as GPS guided JDAM's, which might be useful for taking out the pirate motherships (but not accurate enough to take out the small attack vessels, which require the use of hellfires (which have been used numerous times to take out moving cars).
These aircraft are the ultimate in deadly persistence, think of them as instant air strikes. That is how they are being used in Iraq and Afghanistan. Merchant ship convoys, and mass patrols via ship have been proposed by the US and allies operating in the area to respond to the pirate threat, but they are ill suited for the task and would be much more costly than a couple squadrons of these craft.
What is needed is persistent situational awareness and instant interdiction capability at minimum cost and the Predator / Reaper setup provides just that. Destroyers and frigates, unless en masse, cannot provide pirate free shipping lanes. However, a squadron of Predators and Reapers in flight in the Gulf would easily be able to track all mothership vessels and obliterate any pirate attacks before they reached their targets.
Think about it, it costs $340 MM for an amphibious assault ship like the USS Boxer, $450 MM for Aegis Missile Destroyers like the USS Bainbridge, and at least $70 MM for guided missile frigates like the USS Hallyburton, all of which are totally unsuited for small craft interdiction.
A complete squadron of Reapers, consisting of 12 aircraft, the ground stations, and all other hardware runs $200 MM per squadron of 12 aircraft, while a Predator squadron runs $90 MM. For the cost of a single Aegis Destroyer, you could field a squadron of Reapers for long range interdiction (out to 1500 miles) and three squadrons of Predators (out to 1000 miles), using less fuel, fewer men, and putting no lives in harms way. You would have much much higher situational awareness and interdiction capability, assuming 3/4 of units are deployed at any given time that's 36 flying missile truck surveillance planes.
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