Too Big To Flail
October 20, 2010
“Another day, Staring out of my window, Thinkin’ bout tomorrow, Wishing things would clear, No need to rush, I ain’t gonna worry, Any moment my sorrow, Is bound to disappear” (Buckshot Lefonque – 1997)
Oh how we equity traders wish things would clear, how do we long back for the days when all price action was simple and straightforward, when good news was good and bad news was bad, when we weren’t caught in this new paradigm. Well, it seems we might just get our wish and isn’t it true that you have to be careful what you wish for?
The worry is back, after weeks of simmering in the main stream media, today they finally got the message where this foreclosure mess will really hurt the banks: on their balance sheets. Bloomberg and CNBC earlier reported that ‘Pimco, Blackrock and the New York Fed are said to seek Bank of America mortgage putbacks’.
“Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said”
As this and various other blogs have been reporting over the past few weeks, faulty appraisals, invalid or incomplete loan documents or bad foreclosure procedures, can lead to so called putbacks, where bondholders will try to sell their ‘underwater’ financial instruments back to the issuing companies, not at market value, but at par. JPM Morgan put the total putback risk at between $80 billion and $145 billion:
“We estimate putback risk to be approximately $23-$35bn for agency mortgages, $40-80bn in non-agency and roughly $20-30bn for second liens and HELOCs. However, there are a number of reasons why these estimates are on the high end, including losses already taken and loss reserves established” (Click here for the full report on Scribd or scroll down to the end of this blog)
Bank of America was quick to come out with a statement saying “Not responsible for loans hurt from bad economy, Doesn’t think breached obligation as servicer”, but the fact that none others than Pimco, BlackRock and the FED are trying to get their money back in such a high-profiled way leads me to believe they are in fact responsible in some way.
Meanwhile the FED-members came out with conflicting views on QE II. Evans, Lockhart and Dudley (Chicago, Atlanta & New York) said that QE II is necessary and will need large scale buying of securities, while Fisher (Dalls) and Kocherlakota (Minneapolis) continued to express skepticism about the efficacy of further asset purchases.
Especially Fisher had some harsh remarks on the subject: (from his speech in New York)
- There is abundant liquidity in the economy
- Efficacy of further accommodation “not all that clear”
- Sees ‘moderate’ growth after third quarter
- The reality of fiscal and regulatory policy inhibiting the transmission mechanism of monetary policy is most definitely present and is vexing to monetary policy makers. It is indisputably a significant factor holding back the economic recovery
- In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places
And from the ensuing Q&A:
- Hoenig’s dissenting views ‘worth listening to’ (remember, Hoenig is the only Fed President that keeps voting against keeping interest rates at these extremely low levels)
So what did this all mean to the market. Conflicting FED signals, financials under pressure (even after better than expected numbers from State Street, Goldman and Bank of America) because of rising CDS prices on the back of these putback stories and technology in the dog house after Apple and IBM numbers Monday after hours, made the markets pull back over 1%. It seemed the risk trade was definitely off today as the $ advanced and Gold gave back more than 2%
Dow -1.48% S&P -1.59% Nasdaq -1.76% EUR$ 1.373 WTI $79.49 Gold $1332
On the back of the $ strength Basic Materials and Oil&Gas were the main losing sectors -2.5% While Utilities were down the least -0.66%
After hours Yahoo is trading up +1.5% after beating eps but missing on revenue.
Last but not least, it seems the trade/currency war heated up just a little more yesterday with China halting Rare Minerals exports to US and Europe according to the New York Times. China mines 95% of the world’s rare earth elements, like Rubidium, Tantalum, Beryllium and Neodymium, many of which have shot up a few 100% in price this year as they are being used in virtually anything these days, from cars to wind turbines and guided missiles.
“A few rare earth shipments to the West had been delayed by customs officials in recent weeks, industry officials said, but the new, broader restrictions on exports appear to have been imposed Monday morning. They said there had been no signal from Beijing of how long rare earth shipments intended for the West would be held at the docks by Chinese customs officials. Nor is it clear if occasional shipments are still being allowed out of the country, or if all shipments have now been suspended.”
Let’s hope this is not a presage to an escalating trade/currency war.
Happy Hunting & Let’s be careful out there !!!
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