Stocks and investing thread

[NorthSideSox72]

And today... from the AP...

Gen-ie-ous, NSS.

Heh. Nice. Unfortunately, I didn't have the cash available at that time to put my own money on that move. Wish I had.

 

[Balta1701]

So, it appears that the Administration is ready to announce a voluntary agreement with a lot of the banks/mortgage lenders out there to try to do something about the whole mortgage reset issue, and at least according to this Bloomberg piece it seems like something of a bipartisan agreement. Personally though, I think from my understanding of what got us into this mess, the deal winds up not being of much use.

 

The idea is; for a specific group of mortgage-holders, the reset in their loan, which for a lot of people is still coming and which would push the loan to much higher pay rates, is delayed 5 years. While this sounds like a good idea just in that it would give people who can't afford the mortgages they took out a chance to at least delay and spread out the impact, the devil appears to be in the details. Specifically:

People familiar with the agreement said yesterday that it covers a group of subprime borrowers who could afford starter rates on their mortgages but not the higher payments after they reset.

According to other sources, this breaks down thusly:

People who qualify:

 

* have an income and live in their homes

* are currently making their payments on time

* would default if their interest went up

 

Also:

 

* ARM mortgage has to have been taken between 1/05 and 7/7

* Has a rate reset between 1/8-1/10

 

And you don't qualify if:

 

* have missed payment

* can afford mortgage rate increase

* don't have an income

* own homes which are worth less than their mortgage

If you go through all of those, that seems to me to be quite a small group of people who would actaully qualify. Especially given the last one; a great number of these ARM's were taken out on homes that people were buying simply for speculation purposes, expecting the value to go up and thus turn a profit on the transaction. But if the value went down, that prevents it from doing anything. And an awful lot of the loans taken out in the last 2 years are already late as it is.

 

I think I'm fairly torn on this whole government intervention issue here. On one hand, the fact is if the government does nothing, the recession due to this mess is going to be longer and deeper and not spread out at all. On the other hand, the more the government does, the more it rewards people who either took out loans foolishly or rewards the people who sold and then financially buried the risk in these loans, and thus winds up removing the sting that we'd hope would prevent this same thing from happening 8 years down the road once the next "market that will always go up!" is found.

[southsider2k5]

My opinion on this, for whatever its worth, is that this is a terrible deal. It will literally stall the mortgage market for the next 5 years, and really make it difficult for anyone with middling credit or lower to get a home loan. Part of the appeal of the American economy, and its ability to bounce back quickly from slowdowns is the ability to take a loss against bad debt and move on. As a bank you are only allowed to have a certian percentage of your deposits out in the form of loans. The longer these bad and unprofitable loans sit on the books, the fewer and fewer people will be able to borrow, because they are going to be crowded out of the lending marketplace by these loans that are sitting in pergatory. If you own bank stocks, sell them now. If you want historical references, look into the Japanese real estate crashes of the 1990's and the state owned Chinese businesses. Bad debt hinders economic recovery everytime. This bill is a terrible deal. It will be interesting to see how the next President gets blamed for falling homeownership rates.

[NorthSideSox72]

So, it appears that the Administration is ready to announce a voluntary agreement with a lot of the banks/mortgage lenders out there to try to do something about the whole mortgage reset issue, and at least according to this Bloomberg piece it seems like something of a bipartisan agreement. Personally though, I think from my understanding of what got us into this mess, the deal winds up not being of much use.

 

The idea is; for a specific group of mortgage-holders, the reset in their loan, which for a lot of people is still coming and which would push the loan to much higher pay rates, is delayed 5 years. While this sounds like a good idea just in that it would give people who can't afford the mortgages they took out a chance to at least delay and spread out the impact, the devil appears to be in the details. Specifically:

 

According to other sources, this breaks down thusly:

If you go through all of those, that seems to me to be quite a small group of people who would actaully qualify. Especially given the last one; a great number of these ARM's were taken out on homes that people were buying simply for speculation purposes, expecting the value to go up and thus turn a profit on the transaction. But if the value went down, that prevents it from doing anything. And an awful lot of the loans taken out in the last 2 years are already late as it is.

 

I think I'm fairly torn on this whole government intervention issue here. On one hand, the fact is if the government does nothing, the recession due to this mess is going to be longer and deeper and not spread out at all. On the other hand, the more the government does, the more it rewards people who either took out loans foolishly or rewards the people who sold and then financially buried the risk in these loans, and thus winds up removing the sting that we'd hope would prevent this same thing from happening 8 years down the road once the next "market that will always go up!" is found.

1. I have zero sympathy for speculators caught up in this - they are investors and elected to put their money at risk. Therefore, ANY deal like this should make sure to exempt them from protection. That means any of this sort of aid should only apply to primary residence mortgages, and further, only to people with mortgages on a SINGLE property.

 

2. As usual, I tend to take a market naturalist position on this. I'd rather do nothing than do what is proposed here. The rate resets SHOULD shake the market up, so that it learns from its mistakes. The bigger concern is going forward, how do you get consumers to know what they are doing. Financial education, as I've said before, should be an absolute requirement for graduating high school (and I don't mean a day balancing a checkbook in Home Ec).

 

3. Who defines the word "afford" here? Because that could have a huge effect on who this might really help.

 

4. Here is a government action that could actually help - take the Simple Mortgage Overview document that some states require - a one page check list of sorts, stating the basics of the mortage agreement - and add to it a plain language explanation of how resets work and what the consequences are. Make this a federal requirement for all mortgages. Make them initial each line item on the form, including the ARM description, and then sign the document with a notary. Leave no doubt about what they are getting themselves into.

 

5. What does this do for people already behind due to the crisis? Or people who are in trouble because they lost a job? Nothing. Its useless to them.

 

4.

 

[StrangeSox]

More government hand-outs for everyone! Financial responsibility for none!

 

NSS, your list is a good one.

Edited December 6, 2007 by StrangeSox

[Balta1701]

As he announced his plan to ease the mortgage crisis for consumers, President Bush accidentally gave out the wrong phone number for the new “Hope Now Hotline” set up by his administration.

 

Anyone who dialed 1-800-995-HOPE did not reach the mortgage hotline but instead contacted the Freedom Christian Academy — a Texas-based group that provides Christian education home schooling material.

 

The White House press office quickly put out a correction moments after the President’s remarks. After dialing the correct number, 1-888-995-HOPE, CNN was connected to a “counselor” within three minutes.

See, he's crafty. He's trying to make it even harder for people to get into this program!

[NUKE_CLEVELAND]

Probably a good trade but for the wrong reason. We got as low as 1405 earlier in the week and now we're knocking on resistance. 85 points on the S&P is a lot to digest in one week. I bet you we're above that level by year end though.

 

 

Took only about a week to close firmly above that 1490 resistance. Barring any major bad news we're headed back for the old highs I think.

[Cknolls]

Took only about a week to close firmly above that 1490 resistance. Barring any major bad news we're headed back for the old highs I think.

 

 

I think a right shoulder is forming, 1540-1550, should complete the head and shoulders. Then we head back to the downside. These crises usually end when someone, i.e., some company goes belly up. It is just a matter of time.

[NorthSideSox72]

I could swear I said this like 2 months ago.

 

[Cknolls]

You think the sub-prime mortgage/cdo/siv/mkts are melting down, they are a drop in the bucket compared to counter-party risk in the derivative mkts. As of Q3 2007, the (BIS), Bank for Int'l. Settlements, is reporting that derivatives traded on exchangessurged 27% to 681 TRILLION DOLLARS. They also said investors may have shifted some trading to exchanges from the over-the-counter mkt to reduce the risk of counter-parties defaulting on deals.

[NorthSideSox72]

You think the sub-prime mortgage/cdo/siv/mkts are melting down, they are a drop in the bucket compared to counter-party risk in the derivative mkts. As of Q3 2007, the (BIS), Bank for Int'l. Settlements, is reporting that derivatives traded on exchangessurged 27% to 681 TRILLION DOLLARS. They also said investors may have shifted some trading to exchanges from the over-the-counter mkt to reduce the risk of counter-parties defaulting on deals.

I wouldn't worry about listed derivatives counter-party risk so much. Most of those traded instruments are done top-month in contract, or within a couple periods, so your risk window is less than a year for 90%+ of your exposure. Plus the clearing houses like CME and Eurex are very, very well capitalized, not to mention when they see the slightest blip, they adjust their margin requirements immediately. I'd in fact say that since its a gigantic number in LISTED instruments, that makes me feel a little better.

 

The place to worry is the OTC market. Swaps, for example, are getting really big really fast. And while there are some tools available to connect front offices, the settlement is still all 1-to-1. The LCH tried to start a common clearing house for swaps a while back, called Swapclear, but I think that died off. CME is now attempting the same, I believe. That will happen eventually. But in the meantime, swaps are much longer term contracts, so in that case its a double whammy of risk - extended risk periods and OTC agreements. Plus the usual potentially-infinite risk of derivation, and I can see the swaps markets going haywire if, for example, a lot of default calls occur, like you'd have in the CDS markets. And guess what? With all the mortgage mess, those default calls are in fact bound to increase. So yeah, in the OTC markets, swaps particularly, I can see a lot of risk being taken on there.

 

[Cknolls]

I wouldn't worry about listed derivatives counter-party risk so much. Most of those traded instruments are done top-month in contract, or within a couple periods, so your risk window is less than a year for 90%+ of your exposure. Plus the clearing houses like CME and Eurex are very, very well capitalized, not to mention when they see the slightest blip, they adjust their margin requirements immediately. I'd in fact say that since its a gigantic number in LISTED instruments, that makes me feel a little better.

 

The place to worry is the OTC market. Swaps, for example, are getting really big really fast. And while there are some tools available to connect front offices, the settlement is still all 1-to-1. The LCH tried to start a common clearing house for swaps a while back, called Swapclear, but I think that died off. CME is now attempting the same, I believe. That will happen eventually. But in the meantime, swaps are much longer term contracts, so in that case its a double whammy of risk - extended risk periods and OTC agreements. Plus the usual potentially-infinite risk of derivation, and I can see the swaps markets going haywire if, for example, a lot of default calls occur, like you'd have in the CDS markets. And guess what? With all the mortgage mess, those default calls are in fact bound to increase. So yeah, in the OTC markets, swaps particularly, I can see a lot of risk being taken on there.

 

The notional value of CDS(Credit Default Swaps) today surpasses the amount of underlying cash bonds by an order of magnitude. Today, CDS contracts now total $45.5 trillion of outstanding credit risk, growing an amazing 9-fold in the last three years alone. $45 trillion is almost 5 times the U.S. national debt and more than 3 times U.S. GDP.

 

This CDS mkt is woefully undercapitalized. Sellers of credit protection post margin for marked-to-market moves, but CDS contracts are generally uncollateralized. Investment banks hold one side of each CDS transaction claim to be hedged, but their financial statements show neither loss reserves nor bad debt reserves for potential counter-party failure.

[Cknolls]

CDS' are the first domino.

 

The second is the High yield bond mkt, aka "Junk Bonds". Each year since 2004, more than 40% of all new debt held ratings below investment grade. For perspective, the proportion of new paper of such poor quality issued in each of the last four years far exceeded the proportion of such issuances in any year since the late 1980's. Defaults of high-yield bonds within the first five years of issuance occur 28% of the time for those just below investment grade and 47% of the time for those with the lowest ratings. A disproportionate amount of low grade paper hit the mkt in recent years, but that was not all. Investors were not compensated for taking risk. High-yield spreads over Treasury yields have hovered around historical lows for four years. Making matters worse, approximately 1/3 of all sinlge-name CDS are derivatives of credits with ratings below investment grade.

[NorthSideSox72]

The notional value of CDS(Credit Default Swaps) today surpasses the amount of underlying cash bonds by an order of magnitude. Today, CDS contracts now total $45.5 trillion of outstanding credit risk, growing an amazing 9-fold in the last three years alone. $45 trillion is almost 5 times the U.S. national debt and more than 3 times U.S. GDP.

 

This CDS mkt is woefully undercapitalized. Sellers of credit protection post margin for marked-to-market moves, but CDS contracts are generally uncollateralized. Investment banks hold one side of each CDS transaction claim to be hedged, but their financial statements show neither loss reserves nor bad debt reserves for potential counter-party failure.

As I said, I agree that the CDS market is a scary area right now, and the fact that some banks don't hold reserves to cover their callable risk on the receive side of those contracts is part of the reason.

 

But, I wouldn't get all panicky about a market collapse or anything either. And I would also not focus so much on notional value, which is not the same as real exposure from a risk perspective. Only a small percentage of the underlying bonds are at any real default risk anyway, and only a very small percentage of those have had credit protection purchased via CDS. The real capital risk is a very small fraction of that $45T number.

 

That isn't to say you may not see some financial institutions get clocked pretty hard by this though, if they don't cover themselves. They aren't clearing houses, and their capital is essentially multi-collateralized for exposure purposes. There is definitely significant risk there.

 

[Cknolls]

As I said, I agree that the CDS market is a scary area right now, and the fact that some banks don't hold reserves to cover their callable risk on the receive side of those contracts is part of the reason.

 

But, I wouldn't get all panicky about a market collapse or anything either. And I would also not focus so much on notional value, which is not the same as real exposure from a risk perspective. Only a small percentage of the underlying bonds are at any real default risk anyway, and only a very small percentage of those have had credit protection purchased via CDS. The real capital risk is a very small fraction of that $45T number.

 

That isn't to say you may not see some financial institutions get clocked pretty hard by this though, if they don't cover themselves. They aren't clearing houses, and their capital is essentially multi-collateralized for exposure purposes. There is definitely significant risk there.

 

The third domino is counter-party risk.

 

As derivative mkts replaced cash mkts in the trading of debt, counter-party risk was created. Each CDS is a swap between two counterparties, and a broker-dealer is on one side of every transaction. In cash markets, the performance of the debtor is the creditor's only concern. In the derivative markets, the lender must also be concerned with the performance of the counterparty.

 

Counterparty risk in the CDS market lies with sellers of protection, or the insurers of risk. Banks are the primary sellers of CDS, totaling 40% of all written CDS and representing notional exposure of $18.2 trillion. Banks claim to run hedged books, effectively serving as a market-maker in the CDS market. As evidenced in the sub-prime events, most are unable to fully hedge their risk. If you thought banks were asleep at the wheel during subprime, consider this: The "counterparty Considerations section in the Credit Derivatives Primer of market share leader JP MOragn is a single paragraph on the last page of the volume, which proclaims "the likelihood of suffering (counterparty default) is remote.

 

Hedge funds are in over their heads as well, as they are sellers of 32% of all CDS, insuring exposure of $14.5 trillion. Recent estimates indicate the entire hedge fund mkt has approx. 2.5 trillion in net assets under management. Thus, hedge funds are bearing risk in excess of their ability to pay the piper if anything goes wrong.

 

[NorthSideSox72]

The third domino is counter-party risk.

 

As derivative mkts replaced cash mkts in the trading of debt, counter-party risk was created. Each CDS is a swap between two counterparties, and a broker-dealer is on one side of every transaction. In cash markets, the performance of the debtor is the creditor's only concern. In the derivative markets, the lender must also be concerned with the performance of the counterparty.

 

Counterparty risk in the CDS market lies with sellers of protection, or the insurers of risk. Banks are the primary sellers of CDS, totaling 40% of all written CDS and representing notional exposure of $18.2 trillion. Banks claim to run hedged books, effectively serving as a market-maker in the CDS market. As evidenced in the sub-prime events, most are unable to fully hedge their risk. If you thought banks were asleep at the wheel during subprime, consider this: The "counterparty Considerations section in the Credit Derivatives Primer of market share leader JP MOragn is a single paragraph on the last page of the volume, which proclaims "the likelihood of suffering (counterparty default) is remote.

 

Hedge funds are in over their heads as well, as they are sellers of 32% of all CDS, insuring exposure of $14.5 trillion. Recent estimates indicate the entire hedge fund mkt has approx. 2.5 trillion in net assets under management. Thus, hedge funds are bearing risk in excess of their ability to pay the piper if anything goes wrong.

You are mischaracterizing derivatives markets. What you are talking about are OTC derivatives markets, where you assume a lot of counterparty risk. The traded markets with clearing houses are there to neutralize much of that risk. CDS' are traded exclusively (at this point) on OTC, so yes, they put people at full risk against counterparties.

 

[Cknolls]

You are mischaracterizing derivatives markets. What you are talking about are OTC derivatives markets, where you assume a lot of counterparty risk. The traded markets with clearing houses are there to neutralize much of that risk. CDS' are traded exclusively (at this point) on OTC, so yes, they put people at full risk against counterparties.

 

Where did I mischaracterize derivatives?

[NorthSideSox72]

Where did I mischaracterize derivatives?

You seem to be attaching the concept of counter-party risk with whether or not the instruments are derivatives. The two facts are unrelated. What creates counter-party risk is the lack of a clearing organization between the parties. Therefore, listed and cleared derivatives have no more counter-party risk than, say, stocks and bonds. Where you get counter-party risk is with OTC instruments, such as CDS's.

 

[Balta1701]

I think a right shoulder is forming, 1540-1550, should complete the head and shoulders. Then we head back to the downside. These crises usually end when someone, i.e., some company goes belly up. It is just a matter of time.

So, the market got a 1/4 point cut today instead of the 1/2 point cut it was talking about, and right now it is hanging out at around that 1490 level Nuke referred to.

[Cknolls]

So, the market got a 1/4 point cut today instead of the 1/2 point cut it was talking about, and right now it is hanging out at around that 1490 level Nuke referred to.

 

What's your point?

[Cknolls]

We blew through two important support numbers so far. 1501.828 is the 50 DMA. And 1485.043 is the 200 DMA on SPX. We are still in a down trend. I think we see 1300's before 1600's. I would feel more comfortable if we were to go a little higher on the SPX before selling off, but mkts have a mind of their own and so far today is the third lower high.

[Cknolls]

Will LEH have a surprise for us on FRI? I think they are hiding something in their closet. Support is now resistance. When will Boom Boom realize his quarter point Band-Aids are not for broken bones?

[Cknolls]

Is Boom Boom setting us up for another surprise rate cut? Maybe during options expiration? Thin tapes the rest of the year. Ben is engineering the ASSET DEFLATION EXPRESS TRAIN. Where and when it stops, only he knows.

[Cknolls]

Correction. LEH reports tomorrow (THUR), not FRI.

[Cknolls]

Can you say MANIPULATION.