Saturday, August 30, 2008

Export adjusted Capital Goods

We have mentioned two days ago that non-defense ex aircraft capital goods portraited a rosy picture where business consumers have been spending to shore up sagging economy. Non-defense ex aricraft figures have not showed sharp drop since 2006. Some analysts think it was lead by exports due to weaker dollars. This chart indicates the impact of weaker dollar on durable goods. As shown, the exports in capital goods has soared almost ~70% while non-defense ex airecraft items only surged ~10% since 2006.
But it is worth mentioning that capital exports flatten out since the begining of 2008, indicating the strong demand form overseas is fading. If we adjust non-defense using exports, the QoQ domestic non-defense ex aircraft increased moderately (annualized QoQ around 5% in Q2 08). But the figure was negative in Q1 08. It means that US domestic business consumers did invested more in capital goods in Q2 compared to Q1.

Thursday, August 28, 2008

Where is recession? - stimulus package and weak dollar shore up Q2 GDP

The country has been basking in the joy of DNC, falling oil, and yesterday's surpisingly high figure of durable goods. Today GDP number lend a momentum to the exuberance. Annualized Q2 QoQ GDP was revised upward to 3.3% from 1.9%, previously annouced. The largest contributor is export, 3.1%, driven by weaker dollars. Personal consumption growth 1.7%, probably driven by stimulus package, which might be unstained.

China Firms Dial Up Debt Issues - WSJ

Corporate bond issusance soared +50% to $25 bil, as other equity windows close. But most deals are privately brokerd by hedge funds. Teh bulk of issuers are property builders as they are furthe pincked by slumping housing market..... HONG KONG -- Corporate China is turning to debt now that its years-long love affair with stocks is on the rocks. Many of mainland China's major companies are issuing billions of dollars in corporate bonds, even as the rest of the world shies from debt. Investors are encouraged by expectations of a rising yuan, which would goose returns for foreign bondholders and also helps Chinese firms issue bonds on less-costly terms. Scott Pollack Less-established, cash-strapped Chinese companies, which had been counting on initial public offerings that were scotched by declining stock markets around the world, are finding hedge funds to be the lender of last resort, although the loans sometimes come at a heavy price to the borrower. China's ailing stock market, skittish bank lenders and Beijing policymakers hoping to tame growth and slow inflation have curtailed other routes to raising capital. After nearly doubling in 2007, the benchmark Shanghai Composite index is down more than 55% this year. "The equity market is pretty much closed," sad Neil Ge, who has been appointed to run Credit Suisse's mainland securities business. "For corporations to raise money, the only way is to tap the bond markets." Mainland China's corporate-bond issuance has jumped almost 53% this year to date from the same period in 2007, with Chinese companies selling about $25 billion in bonds, according to Thomson Reuters. Bankers say their China pipelines remain flush for the next few months. "We are expecting issuance to be twice as big as it was last year," Mr. Ge said. China's bond market is still tiny in comparison to the U.S., which has sold $1.2 trillion in bonds this year. Still, issuance in the U.S. is down 41% from last year, according to Thomson. In Japan, corporate-bond issuance has fallen 6% in dollar terms. The credit crunch has reduced demand for higher-yielding, higher-risk debt, while corporations of all stripes have come under pressure to reduce the amount of debt on their balance sheets. China has helped send Asian corporate bond issuance to record levels. Proceeds from corporate debt sales in Asia, excluding Japan, stand at $91.01 billion so far this year, up 3.6% from a year earlier, according to Thomson. In July, Beijing North Star Co., a publicly traded property company partly controlled by the Beijing city government, sold about 1.7 billion yuan (around $248 million) in five-year bonds. Earlier in the year, Shenzhen Development Bank Co. issued bonds totaling 6.5 billion yuan. Oil producer PetroChina Co. and China Merchants Bank Co. are seeking approval to sell new bonds valued at a combined total of as much as 90 billion yuan. Beijing North offered investors a coupon rate of 8.2%; Shenzhen Development Bank is paying 6.1%. China's corporate-bond market also benefited from a regulatory change. Last year, new rules from the China Securities Regulatory Commission let publicly traded companies in China sell corporate bonds over the same Shanghai-based system that distributes initial public offerings of stock to individual investors. While the bulk of these bonds are sold domestically, foreigners can buy a limited supply through a government program. Western investment banks are eager to grab the underwriting business, but few are eligible. Chinese regulators require them to have an approved venture on the mainland and first obtain an underwriting license there. UBS AG dominates among Western banks; Credit Suisse hopes to compete in this area soon. Chinese property companies are among the biggest issuers of new debt, as a weakened domestic real-estate market has put further pressure on their finances, said an investment banker at UBS Securities, the bank's Chinese unit. Meanwhile, the more cash-strapped Chinese companies have won financing only through private deals with hedge funds, which are charging hefty rates in return for capital. Hedge funds active in private debt include Milwaukee's Stark Investments and New York's D.E. Shaw Group, as well as the internally run hedge funds of large banks, such as Merrill Lynch & Co. and Deutsche Bank AG. The funds hope to obtain better returns in private deals than possible now from stocks. "The market being what it is, the only thing they've got left is private deals," said Peter Churchouse, a fund manager at LIM Advisors, a hedge-fund firm in Hong Kong. In July, internal hedge funds at Merrill Lynch and Deutsche Bank pumped approximately $500 million into Guangzhou property company Evergrande Real Estate Group, according to people familiar with the matter. It was their second infusion in recent months into the company after a hoped-for initial public offering of stock faltered. Private Affairs Because such deals usually aren't disclosed publicly, details on amounts and terms are hard to come by. Evergrande didn't respond to calls or emails seeking comment. But in many cases, hedge-fund managers said, the loans can be expensive. Hedge funds say interest rates on some deals have risen to the high teens, and in some cases exceed 20% compared to 8% to 10% last year. Capital controls on the mainland mandate that these private loans are denominated in a foreign currency and reside offshore. Some deals contain what are known as "ratcheting provisions," say people familiar with the terms, which allow debt holders to purchase unspecified amounts of stock at discounts over time and may give them larger equity stakes than business owners intended. Crackdown Coming? Some investors say they worry that the terms could invite a crackdown on foreign firms. A decade ago in the U.S., deals that gave lenders ever-higher equity stakes became known as "death spiral convertibles." In several instances, companies later alleged in lawsuits that the bondholders sold shares short to push down prices so they could acquire large chunks of equity. Short sales involve selling borrowed stock in a bet that the price of those shares will fall before the loan has to be repaid. Hedge funds say that under terms in China, lenders typically can't wind up with a controlling stake in a company.

Wednesday, August 27, 2008

July 08 Durable Goods

--It provides solid clues that consumers, especially corporations, are more willing to invest. It is a good sign, indicating that economy will bottom out soon. Analysts claimed the surprising increase was fueled by weak dollars.
--New orders increased 1.3%, reflecting more demand for druable goods. The figure in June 08 was revised upward 1.3%. --Capital Goods, especially non-defense cap good, an important item reflecting corporations' invesment spending, increased 1.6%. Small corporations (Capital goods non-defense and ex aircraft) increased 0.6%, growing months in a row.
--The chart on the left shows the shipped non-defense ex aircraft capital goods on the quarterly basis. A sharp drop occured during each recession. Surprisingly, there has been no major decline since mid of 2005.
--It is hard to argue that weak dollar is keeping up the capital goods spending. Looking at the GDP export, the QoQ average growth rate was 8% before Q3 06 and averagely increased to 9% until Q2 08.
--If the history offers a lesson, it tells us that the economy probably has not entered a recesion yet, and might not this year. That might partially explaines no official annoucement of recession yet.
--The chart on the right shows the new orders of non-defense ex aircraft capital goods on the quarterly basis. It further indicates that economy has not entered a recession yet.

SEC Moves to Pull Plug On U.S. Accounting Standards

SEC's proposal will allow, ultimately require, Amerian companies to follow IFRS rules. The proposal will lower barriers for international investments, hopefully shoring up the status US exchanges in international listings. GAAP are based on detailed rules while IFRS is more general, which tends to inflate earnings... WASHINGTON -- The Securities and Exchange Commission sounded the death knell for U.S. accounting standards, kicking off a process Wednesday that could ultimately require all American companies to follow an international model instead. Introduced in two steps, the shift could eventually cut costs for companies and smooth cross-border investing. At the same time, investors worry it will create confusion, especially during the transition. Others critics worry that the international system offers too much wiggle room for companies, compared with the more precise rules enshrined in U.S. standards. The SEC's proposal would allow some large multinational companies to report earnings according to international accounting beginning in 2010. The SEC estimates at least 110 U.S. companies would qualify based on their market capitalization, among other factors. The agency also laid out a road map by which all U.S. companies would switch to International Financial Reporting Standards, or IFRS, beginning in 2014, at the expense of U.S. Generally Accepted Accounting Principles, the guiding light of accountants for decades. The proposals will be open for public comment for 60 days and could be finalized later this year. U.S. corporations gave the news a qualified welcome. Margaret Smyth, controller at aerospace and building-services conglomerate United Technologies Corp., said the possibility of having one set of books around the world, though still years away, would result in "tremendous savings." In the short term, Ms. Smyth said the shift would be expensive and added that "there are some issues that still need to be worked out," particularly in the realm of tax accounting. The SEC says the change will help the U.S. to compete globally because many other nations use the international standards or plan to do so. Larger companies, especially those with overseas subsidiaries, have urged the SEC to move in this direction. They hope a single accounting standard will enable U.S. investors to more easily compare a retailer in the U.S. with one in France, for example. SEC Chairman Christopher Cox noted that 100 countries around the globe use IFRS and two-thirds of U.S. investors currently own securities of foreign companies. "The increasing world-wide acceptance and U.S. investors' increasing ownership of foreign companies make it plain that if we do nothing and simply let these trends develop, comparability and transparency will decrease for U.S. investors and issuers," he said. The proposal marks the capstone of Mr. Cox's push as chairman to lower global barriers for U.S. investors. It also stems from a concern, voiced more loudly before the credit crunch took hold, that Wall Street was losing business to overseas competitors. In particular, some say the New York Stock Exchange and other U.S. exchanges have been a less attractive place for global companies to list their shares because of the distinct U.S. accounting standards. Mr. Cox will likely step down following the November presidential election and the next administration could have different priorities. But several observers say it's likely the shift to IFRS will still occur. Skeptics, even those who agree with the concept of a common accounting language, called the SEC's approach wrongheaded. Barbara Roper, director of investor protection at the Consumer Federation of America, said allowing certain U.S. companies to switch ahead of others would "shift the burden of the translation between the two accounting languages onto investors." When companies can choose which standard to use, "there's every reason to believe...they'll choose the language that paints their financials in the rosiest light," she added. The U.S. accounting system, which is ingrained in textbooks, business schools and company treasuries, is based on detailed rules, while the international system expects companies to follow broad principles. In practice, the systems differ on smaller matters, such as the timing of when a company should note any change in the value of an investment. Under U.S. GAAP, for example, research and development costs are generally treated as expenses when they occur. Under the international standards, once a project gets to the development stage the costs are spread out over time. GAAP also provides specific instructions for industries such as oil and insurance. IFRS doesn't. Higher Earnings Jack Ciesielski, an accountant and publisher of the Analyst's Accounting Observer, says accounting under IFRS tends to lead to higher earnings. He examined filings from 137 foreign companies whose shares traded in the U.S. in 2006. That was the final year that U.S. regulators required these companies to translate their books into GAAP from IFRS. Mr. Ciesielski says 63% of the companies reported higher earnings under the international standard, and the median increase was 11.1%. A move to international standards "will likely inflate the earnings of U.S. companies and mislead investors," said Gregory Pai of Paradigm Asset Management in White Plains, N.Y. On the plus side, he noted, the convergence should eventually allow multinationals to save on their accounting bills. The SEC's road map requires the two bodies that oversee U.S. and international accounting rules narrow the differences. Arnold Hanish, chief accounting officer of Eli Lilly & Co., said he wouldn't recommend that the drug maker adopt the international standards earlier, assuming it was eligible to do so. "We wouldn't be ready," he said, since the company estimates it will take two and a half years to make the shift, which he called "a massive effort." A major issue that remains to be resolved, he said, relates to how inventories will be treated for tax purposes. Big U.S. accounting firms support the push to a single world-wide rule book, and say the transition will take years. D.J. Gannon, a partner with Deloitte & Touche LLP in Washington, figures most U.S. companies aren't ready yet to switch to international accounting, and probably need five to seven years to prepare. "Education and training is a big issue," Mr. Gannon said. Independent Source The International Accounting Standards Board, the London-based body that sets the international standards, is currently funded by companies and auditing firms, while its U.S. counterpart, the Financial Accounting Standards Board, is essentially funded with a tax on companies. The SEC says finding a stable and independent source of funding for the IASB, founded in 2001, is one of the conditions it has set for going ahead with the switch. The SEC and other regulators have agreed to create a monitoring body to fund and oversee IASB. Under that structure, the SEC, which has sole oversight over the U.S. board, would be one of seven regulators overseeing the international board. Some companies, such as Microsoft Corp., say the SEC should recognize that its role would be "different and less direct" as a result. These companies urge the SEC to be cautious in writing its own guidance and interpretations of international rules. Otherwise, they say, several national interpretations of the same global rules may develop, defeating the purpose of a single standard. The SEC has been discussing a shift to a single accounting standard for years. Those efforts intensified last year when the SEC permitted foreign companies to file U.S. financial statements using the international rules. The SEC intends in 2011 to check progress on its conditions, such as independent funding for the international standards board. If it is satisfied, it would recommend starting the shift to the international standards for all U.S.-listed companies in 2014. SEC Commissioner Elisse Walter, a Democrat, called the plan momentous, but said the U.S. should vote for the switch in 2011 "if and only if" the conditions are met.

Tuesday, August 26, 2008

Is Russian Invincible, maybe not - WSJ

'In Russia," wrote the great scholar of Russian imperialism Dietrich Geyer many years ago, "expansion was an expression of economic weakness, not exuberant strength." Keep this observation in mind as Vladimir Putin and his minions bask in the glow of Western magazine cover stories about Russia's "resurgence" following its splendid little war against plucky little Georgia. The Kremlin is certainly confident these days, buoyed by years of rising commodity prices and a bullying foreign policy that mistakes fear for respect -- the very combination that made the Soviet Union seem invincible in the 1970s. But the Soviet Union wasn't invincible. And here's a crazy thought: The same laws of social, economic and geopolitical gravity that applied in Brezhnev's U.S.S.R. apply equally in Mr. Putin's KGB state. Take something as basic as demography. "In the next four decades," noted CIA Director Michael Hayden earlier this year, "we expect . . . the population of Russia to shrink by 32 million people [to about 110 million]. That means Russia will lose about a quarter of its population. To sustain its economy, Russia increasingly will have to look elsewhere for workers. Some of them will be immigrant Russians coming from the former Soviet states, what the Russians call the near abroad. But there aren't enough of them to make up that population loss. Others will be Chinese and non-Russians from the Caucasus, Central Asia and elsewhere, potentially aggravating Russia's already uneasy racial and religious tensions." Or take oil and gas production, which accounts for one-third of the country's budget, 64% of its export revenue, 30% of foreign direct investment, and a little more than 20% of gross domestic product. There's bad news here, too. Oil production is set to decline this year for the first time in a decade, a decline that is widely expected to accelerate rapidly in 2010. Of Russia's 14 largest oil fields, seven are more than 50% depleted. Production at its four largest gas fields is also in decline. Russia drilled about four million feet of new wells last year. In 1990, it drilled 17 million. None of this is because Russia is necessarily running out of oil and gas: Existing fields could be better managed, and huge expanses of territory remain unexplored. Instead, it is a function of underinvestment, incompetence, corruption, political interference and crude profiteering. "If you're running Gazprom but you don't really own it, then your interest is in maximizing short-term profits, not long-term development," a Western diplomat told McClatchy's Tom Lasseter. Amazingly, the system is of deliberate design, as if nothing was learned from the collapse of communism. Parastatal companies are rarely if ever efficient. Yet Mr. Putin has gone about effectively nationalizing entire industries. Foreign investors crave predictability. Yet Mr. Putin has created conditions which his own president, Dmitry Medvedev, calls "legal nihilism." Foreign customers of Russia's commodities seek reliable supplies. Yet Mr. Putin has made no secret of his willingness to turn the energy spigot off whenever it suits his political convenience. With the exception of Robert Mugabe, no other leader has so completely fouled his own nest as Mr. Putin, or squandered so much international good will. In 2003, Mr. Putin formed, with Germany and France, a coalition of the unwilling to oppose the invasion of Iraq. It was a coalition he might have built on to consolidate Russia's place in, and perhaps eventually atop, Europe. Even Condoleezza Rice seemed prepared to go along, with her reported inane comment that the U.S. should "forgive" Russia while "ignoring" Germany and "punishing" France. Instead, we have the spectacles of Russia's nasty meddling in Ukraine's 2004 disputed presidential election, the murder in Britain of ex-KGB man Alexander Litvinenko in 2006, and to cap it off this month's Georgia venture. Now the Poles have agreed to U.S. missile defense, John McCain's call to expel Russia from the G-8 suddenly seems credible, and even European leftists are looking askance at the man they once cheered for his Iraq stance. No doubt Mr. Putin despises these people -- and can afford to, as long as Europe remains overwhelmingly reliant on Russian energy and energy prices remain high. But those prices are bound to fall, as they always have. What will Russia be left with then? And what will it mean for Mr. Putin's clique, where the possibility of infighting has only grown with the split between his ex-KGB siloviki pals who wanted the presidency and the members of Mr. Medvedev's camp who got it? For much of its history, Russia has been a weak state masquerading as a strong one -- a psychological profile in insecurity. That's why it has generally sought its advantage internationally by acting as an opportunistic spoiler, as it now does over Iran, rather than as a constructive partner seeking to magnify its influence (à la Britain) or as a rising power patiently asserting its place (à la China). How does one deal with a neurotic? Not by coddling him. Russia is dangerous but it's also weak, and it would be good to find ways to remind it of that latter fact. Stinger missiles for Georgia would be a start.

Bank Regulators Issue Mroe Memorandums =

'Memorandums of Understanding' Surge As U.S. Races to Head Off More Failures By DAMIAN PALETTA and DAVID ENRICHAugust 26, 2008; Page C1 WASHINGTON -- Federal regulators have increased the number of struggling banks they have effectively put on probation, forcing them to fix their problems and try to avoid potentially costly failures. The Federal Reserve and the Office of the Comptroller of the Currency, two of the nation's primary bank regulators, have issued more of these so-called memorandums of understanding so far this year than they did for all of 2007, according to data obtained from regulatory agencies under Freedom of Information Act requests. These secret agreements can force banks to take steps including raising capital, cutting back on risky loans and suspending dividend payments. The depth of problems in the banking sector will become clearer Tuesday, when the Federal Deposit Insurance Corp. updates its list of "problem" institutions. The FDIC had 90 banks on its list March 31. There have been five bank failures since July 11, and many other banks are considered at risk by regulators. Government officials have been brokering the memorandums with institutions large and small, from National City Corp., a Cleveland bank with $154 billion in assets, to $660 million-asset First Private Bank & Trust of Encino, Calif., a unit of Boston Private Financial Holdings Inc. Banks are struggling with their worst crisis in a generation amid the deterioration of real-estate and credit markets nationwide. "The increase in [memorandums] is not surprising given the more challenging market conditions faced by many banking organizations," said Roger Cole, the Fed's director of banking supervision and regulation. They "are useful in specifying weaknesses in risk management and other areas that need to be addressed by bank management." Because banks don't have to disclose the memorandums, bank customers and investors generally remain in the dark. In some recent cases, federal regulators haven't disclosed more-serious enforcement actions against banks until after those banks have failed. Regulators are often wary of igniting a run on the bank, with panicked customers yanking deposits. Coral Gables, Fla.-based BankUnited Financial Corp. said Monday that its $14 billion banking unit recently entered into an agreement with the Treasury Department's Office of Thrift Supervision over concerns about capital levels, among other things. BankUnited didn't specify whether the agreement was a memorandum or some other type of directive, but the regulator is requiring the company to end its option adjustable-mortgage and alternative mortgage businesses. The inconsistency of public disclosures "is very frustrating as an investor in bank stocks," said Gerard Cassidy, an analyst with RBC Capital Markets, noting that an enforcement action represents a red flag about a bank's health and is likely to put the brakes on that company's growth. "It would be very helpful in an investor's analysis if they knew that an agreement was already signed." For regulators, the memorandums are an early-warning system about troubled banks but aren't meant to imply that a bank is at risk of failing. They are often a precursor to more-severe, publicly disclosed enforcement actions if conditions don't improve. "Enforcement actions, bank failures and so on are sort of trailing economic indicators," said Oliver Ireland, a former Fed attorney who is now a partner at Morrison & Foerster LLP. "We're probably not done with all this yet. Not by a long shot." Speculation about these pacts is enough to drive a bank's stock price down. Washington Mutual Inc. took the rare step in June of issuing a statement to knock down rumors that the bank had entered into a deal with its supervisor, the Office of Thrift Supervision. While regulators wouldn't disclose the names of banks with which they've entered into memorandums, three agencies provided tallies of how many agreements they've arranged, offering a snapshot of the problems engulfing the banking industry. As of June 17, the Fed had entered into 32 memorandums with state-chartered banks and bank holding companies. For all of last year, the Fed entered into 31 such agreements. The Office of the Comptroller of the Currency, a division of the Treasury Department that supervises national banks, entered into nine memorandums with banks through Aug. 15, compared with six in all of 2007. The FDIC, which insures deposits at the nation's banks and thrifts and also is the primary regulator of many smaller lenders, had entered into 118 memorandums as of Aug. 15, compared with 175 for of 2007. The Office of Thrift Supervision, which supervises federal savings and loans, refused to disclose its data. Senior Deputy Director Scott Polakoff said in an interview that the number had jumped. "We have seen a significant spike," he said. "The pendulum has swung" toward tougher regulation, said George Haligowski, chairman and chief executive of Imperial Capital Bancorp Inc. of La Jolla, Calif., one of a handful of firms to publicly disclose in securities filings having agreed to a memorandum. In certain years during the past decade, regulators issued more memorandums, indicating that regulators are still grappling to figure out how best to deal with troubled companies. For example, the Office of the Comptroller of the Currency brokered 32 in 1999 and 31 in 2000. The FDIC entered into 198 of these agreements in 2005. Typically, regulators choose to broker a private agreement if they feel management is being cooperative and the bank's problems can be addressed quickly. The cause of those spikes isn't clear. National City, the big Cleveland lender, confirmed it had entered one with the OCC and the Federal Reserve Bank of Cleveland several days after the fact had been reported in The Wall Street Journal.

Monday, August 25, 2008

Historical Trends Suggest That the Buck Is Back - WSJ

After Dollar's Long Decline, Investors Wonder Whether a Turning Point Is Here The dollar's bounce in recent weeks has investors wondering whether this is the beginning of the end of its extended slide. Such a turning point would be one of only a handful over the past 30 years. Since the late 1970s, the dollar has experienced long, deep, multiyear trends, veering from superstrong to feeble and back. These currency cycles have tended to last from five to seven years in each direction. By that standard, the dollar's decline, now more than six years old, is looking long in the tooth. The dollar touched its recent peak versus the euro in late 2001, and against a broader group of currencies in early 2002. "The biggest question I get is, 'Has the dollar embarked on a seven-year uptrend?'" said Parker King, head of currency investing at Putnam Investments. Some of his clients have started to prepare for that eventuality, he said, by changing their level of exposure to the dollar's movement. The dollar's latest gains -- it is up 8% versus the euro and 5% against the Japanese yen since mid-July -- have been grounded more in pessimism about growth prospects elsewhere than in optimism about those of the U.S. Recent data have confirmed that economies in Europe and Japan are weakening. The dollar also has benefited from lower oil prices, as the two have tended to trade in opposite directions. The U.S. credit crunch, housing slump and other baleful indicators are far from enticing. "These are some of the worst U.S. fundamentals I've ever seen for a [dollar] turn," said Alan Ruskin, chief international strategist at RBS Greenwich Capital. "Nonetheless, it does look like a turn." The record shows that major changes in the dollar's direction take time to unfold and rarely are smooth. In each case, the dollar reached a point of extreme weakness or strength before heading in the other direction. The current slide seems to follow that pattern: From its peak in 2001 until its low last month, the dollar lost nearly half of its value versus the euro, reaching a level that currency experts say is about 30% too cheap based on economic fundamentals. Still, currencies are known to overshoot such theoretical targets, sometimes for long periods of time. At certain points, the cycle began changing only after governments intervened directly in the currency markets. Punchstock So far, there is no sign of such coordinated government intervention, which helped jolt the dollar into moving in different long-term directions in 1985 and 1995, for instance. In 1985, governments intervened to prevent a strong dollar from becoming stronger; in 1995, they did the opposite. Capital flows also play a role in major turns in the dollar, as investors re-evaluate where to put their money around the globe. Around the time of the previous big shift in the dollar, the dot-com bubble popped and a U.S. recession followed. That prompted the Federal Reserve to slice interest rates dramatically, making dollar-denominated investments less enticing. Now tentative signs have emerged that things are turning more positive for the buck on that front. There are stronger inflows coming into the U.S. in search of bargains on mergers and acquisitions. The net total of such deal-related inflows now in the pipeline touched its highest point in seven years at the end of July, according to Bank of America. At the same time, U.S. investors are no longer sending massive amounts of money abroad in search of profits. Mutual funds that focus on investing abroad had net inflows of $9 billion in the first six months of this year, compared with more than $80 billion in the same period last year, according to the Investment Company Institute. Another possible positive for the dollar: Exports are rising, so the U.S. trade deficit is declining. In June, exports registered their largest monthly jump in more than four years. By making U.S. goods more competitive overseas, the dollar's long weakness has helped to mitigate some of the large imbalances in the global economy. However, some investors say that without signs of improvement in the overall U.S. economy, an upturn in the dollar remains unlikely. One condition for the dollar's rally to be sustainable "is that the U.S. economy stabilizes, and that's a huge gamble," said Maxime Tessier, head of foreign exchange at the Caisse de dépôt et placement du Quebec, Canada's largest pension fund, with $155 billion under management. Private investors overseas aren't rushing to buy U.S. stocks and bonds because of such leeriness about the U.S. economy, noted a recent report from Goldman Sachs, a factor it said it would be monitoring closely to gauge the dollar's future trajectory. Even some who think the dollar is bottoming are cautious. David Rolley, who manages $23 billion in global bonds at Loomis Sayles, has been holding more assets in dollars than his benchmark index recommends. Despite the dollar's recent gains, "We're not brave enough to add to [that] trade," he said. "There's still grief and consternation out there."

Sunday, August 24, 2008

TBA vs Dollar Roll

Investors are said to “roll” their MBSs if they execute a simultaneous TBA sell order for one settlement month and a buy order for the same MBS issue in the same amount (such as $10 million of Freddie Mac 30-year 5.5%) for the next settlement month.

The TBA market structure of settlement dates is perceived to enhance liquidity by concentrating trading in a particular product (like 30-year conventionals) into a single settlement date each month. Dollar rolls provide a mechanism to help ease supply/demand imbalances for a particular settlement month. (Dealer is buy august/sept roll).

For example, if a dealer is having trouble obtaining collateral for a new August CMO deal that is about to close, the dealer could bid up the August/September roll (by essentially bidding up the price of August settlement collateral) to a level that induces an investor to do the roll (by essentially selling the collateral to the dealer for August settlement and purchasing the collateral for September settlement). If supply for September settlement is sufficient, this provides a means of alleviating a shortage of collateral for August settlement.

A dollar roll is analogous to a repo, but there are important differences: (1) the party borrowing the securities in a dollar roll does not have to return the same securities, but can instead return “substantially similar” ones; and (2) the original owner gives up principal and interest to the temporary holder of the securities (assuming record dates are passed during the period of the roll).

Risk-Taking Hits Investors In Leveraged-Loan Market - WSJ

Leverage buyout boom loaded many companies with substaintial debt. As economy slows down, they are hitting the wall. The default rate is on the rise, exceeding that of junk-bonds that is usually considered riskier. Furthmore, the recvery rate is expected to be worse than norml, though higher than that of junk-bonds, due to the riskier composition of the market: more second-lien loans, convenate lite loans, and loan-only....

There's nothing like a bad bust to make investors regret a good boom.

The feeling is particularly acute in the leveraged-loan market, where during the bull years of 2006 and early 2007, investors felt emboldened to take on excessive risk.

As a result, the rate of defaults -- instances where a company is unable to make its interest payments or meet the obligations in its debt agreements -- is higher in the loan market than it is in the junk-bond market, which has traditionally been perceived as the riskier of the two markets. To make matters worse, investors stand to recover less in leveraged-loan defaults than what was historically normal because of the riskier composition of the market.

"What that tells you about is the tremendous amount of poor quality financing in the easy money period of 2004 to 2007 and now, when the economy slows down, these companies have way too much debt and they're hitting the wall," Margie Patel, portfolio manager at Evergreen Investments, said. "It also tells you why loans have been trading, in general, at a substantial discount to face value."

The average price in the loan market is around 88 cents on the dollar these days, according to Standard & Poor's Leveraged Commentary & Data unit, down from above 100 cents before the credit crisis.

During the boom, it wasn't uncommon for companies to bring their entire debt package to the market in the form of loans rather than split between bonds and loans. That means some of the riskiest debt, which normally would have been issued in the bond market, is now part of the loan market.

According to S&P's LCD unit, these "loan-only" deals account for a much larger percentage of defaults in the market than in prior years. Of the 25 defaults in 2008, 44% were for companies that didn't have bonds, whereas before 2008, that level was around 12%.

"As the current credit crisis unspools, the loan market's glorious past as a default underachiever might well be history," Steve Miller, managing director of S&P's LCD, said in a research report on the topic. "That's not to say that loan defaults are likely to leapfrog bond defaults. More probable, leveraged loan and high-yield bond defaults seem likely to track more closely in the future than they did in the past."

The trouble is that on top of rising defaults -- the rate in the loan market is currently around 2.92% whereas it is 2.37% for bonds according to S&P -- the prevailing expectation is that recoveries postdefault are going to be lower than they used to be. That is the result of the extra risk-taking investors were partaking in before the blow-up.

Meredith Coffey, senior vice president at the Loan Syndication and Trading Association, points to a number of reasons that recoveries will be lower. Investors allowed companies to issue loans that were less secure, known as second-lien loans. They also accepted fewer protective provisions on loans that became known as "covenant-lite." Investors also allowed companies to add very heavy debt burdens to their balance sheets.

"I think people do expect the loan recovery rate will be lower than historical norms," Ms. Coffey said. "But if you look in the context of high-yield bonds, the expectation is still that loan recoveries are much higher than high-yield bonds."

That's some reassurance for investors, yet hardly enough to keep them from bidding up the price of loans, which are hovering around historic lows. Even in the market meltdown of 2002, the average price of loans remained above 95 cents on the dollar, according to S&P.

Market participants expect that this default cycle will prompt companies and their underwriters to retrench and come back to the market with debt deals that more closely represent the deal-making done before the recent boom, meaning companies will have bonds subordinated to loans, stricter covenants on their loans and lower debt burdens overall.

In this market, the future means a return to the past. Yet the loan and bond markets have already lived through a buyout boom and bust where risk-taking like this was to blame. The question is whether market participants will learn enough from this bust to prevent the cycle from repeating itself again after this credit crisis is over.

Brazilian Focus: Inflation Threat - WSJ

Agonizing experience in the past inflation crisis made Mr Meirelles a die-hard inflation fighter. During one of Brazil's many past bouts of high inflation, Henrique Meirelles recalls, he and his maid had a deal. On payday, she didn't have to work. That way, she could rush to the store and spend her entire month's salary before it became worthless. Mr. Meirelles is now head of Brazil's central bank, and the country's inflationary past is a big reason why he now ranks as one of the world's toughest inflation fighters. Even as the global economy slows, the Banco Central do Brasil has acted more aggressively than many of the world's central banks against inflation, raising short-term interest rates to 13%. The bank is expected to raise rates again in September. Brazil "isn't waiting and won't wait for other central banks to act and make decisions to fight inflation pressures," says Mr. Meirelles, a former president of BankBoston Corp. Mr. Meirelles (pronounced may-RELL-es) has shown before that he means business; a series of rate increases in 2005 ground economic growth to a crawl. Central bankers in developing economies face an agonizing decision in the months ahead. The global economy is slowing and commodity prices have eased, but inflation shows signs of becoming entrenched in many places. In Brazil, Mexico, India, Egypt, Indonesia and elsewhere, central banks have unleashed a wave of interest-rate increases in recent weeks. But if they keep raising rates, they could choke off economic growth, a painful consequence in countries with high poverty rates. Mr. Meirelles, a 62-year-old with a Cheshire-cat grin and a throaty laugh, is on one end of the global debate over how aggressively banks need to act. He and many economists argue that central banks let the world economy get overheated during the past few years of growth and created price pressures that will be hard to eradicate. "While each country needs to make its own decision, we can clearly see that the more central banks act decisively to control inflation, the easier the job is for everyone else," Mr. Meirelles said in an interview. But many other central banks, particularly in Asia, haven't been as tough, figuring the recent slowdown in commodity prices will help solve the inflation problem for them. "Far and away, across the globe, the central bank that's been ahead of the curve is Brazil," says Michael Gomez, co-head of emerging markets at Pacific Investment Management Co., which manages $80 billion in these countries. He calls the decision by some banks to act less forcefully to tame inflation a gamble. If it turns out to be right, it's "no harm, no foul," he says. "If you get it wrong, you're in a tough place." Central banks in developed economies also face the trade-off between growth and inflation. In places such as the United Kingdom, on the brink of recession, interest-rate cuts could be on the horizon. But the inflation problem is more acute in many developing economies. Headline and core inflation, which excludes food and energy costs, stood at 8.6% and 4.2%, respectively, in emerging economies in May, their highest levels since around the start of this decade, according to a report last month from the International Monetary Fund. By contrast, core inflation remained steady at about 1.8% in advanced economies, even as headline inflation increased to 3.5%. Wages and labor costs are accelerating in the developing world, risking new price increases. The Asian Development Bank in July warned that "failure to respond decisively to rising prices risks repeating the mistakes industrialized countries made prior to the Great Inflation of the 1970s." With few exceptions, such as Venezuela and Argentina, central bankers are mindful of this in Latin America. Brazil, Chile, Mexico, Colombia and Peru have tightened monetary policy since early July. J.P. Morgan Chase expects rates in the region to rise an additional percentage point by the end of this year to 11%, on average, after rising more than a percentage point in the past year. Latin America is the only region in the world where bank rates currently exceed inflation, according to Gray Newman, chief economist for Latin America at Morgan Stanley. If Mr. Meirelles and others in the region are now hawks on inflation, that is because it wasn't long ago that the region was losing the fight. Between 1980 and 1994, inflation averaged well over 100% a year in Brazil, hitting a peak of more than 2,000% in the early 1990s. The price increases sapped household spending power and wreaked havoc with business plans. Mr. Meirelles, who comes from Brazil's state of Goiás -- grain and cattle land -- rose through the ranks of the former BankBoston Corp. to become one of the highest-ranking foreigners at a major U.S. bank. He left in 2002 for a successful run for Brazil's Congress in his home state but resigned to take his current position. Since taking over the central bank in January 2003, he has helped steer a Brazilian economic boom in which interest rates and inflation fell to historic lows, consolidating his place as a key power broker who has the ear of the country's president, Luiz Inácio Lula da Silva, a former labor leader whose election in 2002 caused financial markets to panic. On paper, Brazil's central bank is one of the region's least independent. A branch of the finance ministry, its governors are political appointees. Half a dozen candidates turned down the central-bank job before Mr. Meirelles accepted it, according to local reports. Mr. Meirelles says that Mr. Da Silva guaranteed the bank "fully independent" decision-making and has kept the promise. Mr. Meirelles inherited interest rates of 25% and an inflation rate of 12.5%. By February 2003, he had lifted rates to 26.5% -- an unpopular step blamed for slowing Brazil's economic growth. But inflation gradually came under control, hitting its lowest rate in decades, 3.1%, in 2006. That let the bank push rates lower. Lower interest rates sparked a consumer boom. Consumer demand was expanding at a rate of 8.5% by the end of last year, faster than the country's gross domestic product, which grew just over 5% in 2007. Starting this April, Mr. Meirelles's bank took another sharp hawkish turn, saying it needed to cool fast-growing consumer demand inside Brazil. It took rates up a half-percentage point then, and has raised twice more since, in all by 1.75 percentage points. One reason to keep inflation under control: Most labor contracts and apartment leases contain inflation-adjustment clauses, based in part on food prices. Mr. Meirelles's stance has provoked pointed criticism, even within the government. Brazil's vice president, José Alencar, in early August called Mr. Meirelles's higher rates "the path of death" for Brazil's economy. Brazil's influential former finance minister, Delfim Netto, called Mr. Meirelles's policies "infantile." Some economists insist inflation in Brazil is being imported through commodities and that domestic rate increases won't alter that. In April, Guido Mantega, the current finance minister, said if one discounted the rising price of beans, the main ingredient of feijoada, Brazil's national dish, inflation was still a reasonable 4.2%. Exporters complain that higher rates drove up the value of Brazil's currency, making exports less competitive. There are signs, though, that Mr. Meirelles's strategy is paying off. Inflation expectations have eased a bit recently, according to a weekly central-bank survey of economists and market experts. The survey shows economists expect Brazil will flirt with its cap of 6.5% inflation this year. Mr. Meirelles says his goal is to get 2009's inflation figure back to 4.5%. Mr. Meirelles doesn't see much room for leniency. When there is disequilibrium between supply and demand, he says, it will be corrected in one of two ways: higher prices or higher rates. "The big advantage of using the interest rate is that you have someone in the driver's seat. When inflation is taking care of it," he says, "no one is driving."

Clouds gather again over the Pampas - ECO

After six years of rapid growth, Argentina’s economy is at a familiar turning-point, in which the president’s refusal to change course threatens to make it poorer EVER since Argentina began its recovery in mid-2002 from a devastating financial collapse, it has seemed to defy economic gravity. The country’s left-wing government, first led by Néstor Kirchner and then this year by his wife, Cristina Fernández de Kirchner, has violated many standard economic prescriptions: it has shunned the IMF and shafted private bondholders; kicked out foreign companies and set up new state-owned ones; imposed price controls; and even doctored the inflation figure. Yet over the past six years, Argentina’s economy has grown at an annual average rate of 8.3%—faster than any other big economy except China. At last a turning point seems to have been reached. A slowdown, long predicted by the Kirchners’ opponents, is at hand. When compared with the same period last year, retail sales (measured by volume) are down 10% to 15%. On Calle Florida, Buenos Aires’s main shopping street, almost every block has at least one vacant shopfront. Employment in the private sector is still growing, but at half last year’s rate, according to Nicolás Bridger of Prefinex, a consultancy. Meanwhile, inflation has taken off. Almost nobody believes the official index, which shows prices having increased by 9% over the 12 months to July. Credible unofficial estimates put the figure at 25%. By underestimating inflation, the official figures may also overstate economic growth. Throw in the recent fall of up to a quarter in world prices for the country’s farm commodities, and the markets have suddenly become rattled. After years in which it bought dollars to stop the peso from appreciating, the Central Bank has been selling them to boost the currency. On August 11th Standard & Poor’s, a ratings agency, downgraded Argentina’s credit rating. The risk premium on Argentine public debt has soared to 670 basis points above the interest rate paid by American Treasury bonds. The equivalent figure for Brazilian debt is just 240 basis points. Fears of another economic collapse of the kind that Argentina has made its speciality are, in fact, overblown. Most forecasters expect the economy to carry on growing, but at a more moderate rate of 4-5% in 2009. “Argentina’s hyper-growth period is over,” says Miguel Bein, an economic consultant. The country still enjoys budget and trade surpluses. But by common consent, maintaining these surpluses and engineering a soft landing requires policy changes. And therein lies the doubt. Two things have underpinned the growth spurt. The first was the depth of the preceding collapse. In 2001-02 the economy shrank by 15%, unemployment climbed to 21% and poverty engulfed 56% of Argentines. The government defaulted on debts of $80 billion and devalued the peso, which sank to less than a third of its previous value. When growth resumed, idle plant and workers could easily be brought back into action. The second boost was the surge in world commodity prices, and thus in the value of Argentina’s exports (and the taxes on them). The government supercharged growth, stimulating demand with wage increases, price controls, an undervalued peso and public works. This formula worked for much longer than the critics expected. But it has generated big distortions. Inflation has cut into the real value of wages and profits, pushing up poverty again. The government’s energy and farming policies have caused particular problems. It kept energy tariffs frozen at their 2002 level, deterring investment and prompting blackouts last year. Winter has been milder this year, and tariffs have recently risen. But uncertainty about energy supply is another discouragement to investors. The Kirchners have relied on taxing farm exports to fund public spending. This originally had some justification, since farmers benefited hugely from the cheap peso. But Ms Fernández pushed the policy too far, raising farm taxes in March. After months of protests by farmers, Congress voted down the tax increase. The conflict paralysed parts of the economy, and undermined confidence. The economy’s slowdown puts Ms Fernández in an awkward financial position. Energy and transport subsidies now cost 3.5% of GDP, according to Ecolatina, a consultancy. And Ms Fernández wants to spend money on renationalising an airline and on building a high-speed train. To boost its primary budget surplus (excluding interest payments), the government now includes in its accounts revenue from the Central Bank and the pension system. It has also held back payments to provincial governments. But the president, who has become deeply unpopular, has lost the confidence of much of her Peronist party, making that harder. At 55% of GDP, Argentina’s public debt is still large. But the cost of servicing it has been low, partly because of the tough restructuring Mr Kirchner imposed on bondholders. Even so, to service its debts, the government needs to find an extra $2.5 billion or so next year. It cannot tap the international capital markets, because it has still not settled with some bondholders nor its sovereign creditors in the Paris Club. Instead, it is relying on Hugo Chávez. This month Venezuela’s president bought another $1 billion in Argentine bonds (taking his total purchases to $7 billion). The latest bonds pay interest of 15%—the same rate agreed by Domingo Cavallo, a former finance minister, in a notorious bond swap in 2001 on the eve of the collapse. This time the government has plenty of policy tools with which to stabilise the economy. Start with energy, for which Argentines still pay a third less than their neighbours. Further hikes in energy tariffs would improve the public finances, and attract investment. Settling with the Paris Club and the bondholders would enable Argentina to secure financing from the markets on relatively favourable terms. Many economists reckon that these measures would be enough to keep the country growing at a still-healthy annual rate of 4% or so for several years. “These problems should not be difficult to solve,” says Javier González Fraga, a former Central Bank governor. “But no one seems to want to do so yet.” By delaying the necessary adjustments, the government has already made them more painful. And the Kirchners, who govern as a couple, have made their defiance of the IMF, the Paris Club and the bondholders a point of pride. Unless they now swallow that pride, it will be followed by a fall.

Friday, August 22, 2008

CMBS will be the next shoe to drop?

Some Fear Commercial Property Loans Will Be Next Stage in Downturn By LOUISE STORY As the value of home mortgages crumbles by the day, Wall Street has hoped that commercial real estate loans would stay clear of the storm. But bankers believe the headwinds may be shifting after a large apartment complex in Harlem warned last week that it might not be able to make good on a $225 million mortgage payment by September. A default by the complex, the rent-regulated Riverton Apartments, a 12-building residential development constructed after World War II, would be New York’s largest in the current housing crisis. For Wall Street banks, which hold about $100 billion of commercial mortgage-backed securities, the prospect has fanned new worries that a deterioration of the overall commercial property market could prompt more write-downs in the coming quarter, on top of losses already expected from their distressed mortgage securities holdings. “The fear is the next shoe to drop may be commercial real estate,” said Jeffrey Harte, a banking analyst at Sandler O’Neil. “When consumer credit goes south, commercial will follow.” At the end of the second quarter, Deutsche Bank held $25.1 billion worth of commercial mortgage backed securities. Morgan Stanley held $22.1 billion and Citigroup had $19.1 billion. Lehman Brothers, which has the largest exposure to this type of security, is shopping about $40 billion worth of commercial real estate assets, as well as its entire commercial real estate business. A large part of its portfolio is a high-risk loan known as bridge equity made with Archstone, a metropolitan apartment developer, and most of the rest are floating-rate loans, which are riskier, according to a person who reviewed the offering. Banks are scrambling to dispose of these loans, typically made to hotels, office developers and retail strips, before problems arrive. Broader real estate indexes are already showing signs of trouble. Moody’s/REAL Commercial Property Price Index has dropped nearly 12 percent since its peak last October. A more conservative index by the National Council of Real Estate Investment Fiduciaries shows growth slowing to one-half of a percent in the second quarter, from upward of 4 percent a quarter. Loans made for commercial real estate are typically among the safest, because a building can be used as collateral and big property developers generate income from the investment, raising the likelihood they will repay their loans. But cracks began to emerge late last year, when Morgan Stanley reported write-downs of $400 million in commercial mortgage losses. In the first quarter, Wachovia, which had transformed itself into a leading lender in the nation’s commercial real estate market, said it would take write-downs of more than $1 billion for commercial loans for the second half of 2007. Investors had already begun balking at buying securities backed by these bonds, so banks like Wachovia were stuck with loans of diminished value. Around the same time, the New York developer Harry Macklowe was forced to sell seven office buildings he had bought in Midtown Manhattan, as well as the General Motors Building, after he was unable to refinance the loan with his lender, Deutsche Bank. Now, the prospect of an immense default on a commercial residential property in New York — which has not suffered as much as troubled markets like Florida — has lent new momentum to concerns over the stability of commercial real estate loans. As Harlem grew into an increasingly attractive neighborhood at the height of the housing market, bankers assumed that Riverton’s owners could quickly convert many of its roughly 1,230 units from lower-priced rentals to apartments priced closer to the higher market average. That would generate a richer income stream, allowing the companies to pay off high mortgage bills. It was the kind of optimistic assumption that ran rampant in the residential housing market, but one that remained less common for commercial real estate loans. On Monday, Fitch Ratings issued a negative watch on part of the Riverton Apartments trust, saying developers had made only scant progress toward their goal. Rockpoint Group and Stellar Management — the developers that own Riverton — did not comment. Before the credit squeeze, financial companies bundled commercial mortgages into securities in much the same way they packaged home loans and private equity debt. Riverton’s mortgage was one of the last ones to be wrapped into a commercial mortgage-backed security in the spring of 2007; it was then cut up and sold as bonds. A recent report by Lehman Brothers showed that aggressive underwriting is what probably has brought Riverton to the brink of default, not a fundamental deterioration in the overall market. But that report noted that there are other commercial properties that received similar optimistic underwriting, known as a pro forma loan. Ratings agencies have only downgraded a few commercial real estate securities. At Moody’s, the list includes loans given to the Ritz-Carlton in New Orleans, a casino in Atlantic City and a land development deal in Miami. Still, many analysts say a lengthy downturn in the economy would probably lead many commercial property owners to struggle with their mortgage bills. And pricing in commercial real estate is starting to reflect a tightening in commercial lending, they said. “The risk here in commercial real estate is, What happens when those loans mature in two, three, four, five years?” said Nick Levidy, a managing director at Moody’s Investors Service. “When these loans come up for refinancing, unless the credit markets improve significantly, the terms will be quite different.” Citigroup and Deutsche Bank created the commercial mortgage trust that included Riverton’s mortgage in March 2007. Riverton’s loan is the seventh-largest in the $6.6 billion trust, according to Fitch Ratings. After the deal closed, only three other commercial mortgage trusts of comparable size were created before the market collapsed, according to Dealogic, a financial information service. Losses are rising in this sort of trust. Fitch reported last week that delinquencies rose at the end of July to 0.43 percent, from 0.41 percent at the start of the month, a pace of deterioration that has been steady since the winter. Since February, delinquencies on commercial mortgage-backed securities have increased 43 percent. At the same time, investors are also expecting further trouble in commercial real estate bonds. The top-rated part of the index that includes the Riverton Apartments, for instance, indicates that the risk of those securities has increased by 44 percent in the past month, according to Markit, a financial services company. “The housing market’s weak, so market perception is that commercial real estate fundamentals will follow,” said Steve Gordon, managing director of MKP Capital Management, a hedge fund that manages $4 billion.

Thursday, August 21, 2008

MBS Generics vs TBA

Many confuse between the two. Here I make some clarifications --Generics is a kind MBS security. to-be-announced(TBA) generally refers to a trading method. Most/nearly all Generics traded on TBA. That is why people usually confused the two. But agency MBS Pool, not necesarry Generics, can be traded on TBA basis. --Both of them increase mkt liquidity. a.Generics is created to index and simplify market. With more than half million outstading MBS pools, investors will have a hard time trading them. Generics enable investors to focus on a few dimension, (issuers, programs, coupon) without being bothered by too much details. b.TBA makes pools fungible - interchangable.

corporate bonds markets pain rivals march 08

Spreads are still gapping, exceeding the level in March 08. Junk-Bonds spreads rose over the level in 2002. Financial institutions are bogged down on concerns about their ability to raise funds under prolonged credit crunch, weakening economy, and slumping home prices. A string of bonds sales also hamper the market....

The credit markets are treacherous ground for financial institutions, and their recent struggles raising money are dragging down the corporate bond markets.

In recent days, price declines among investment-grade bonds have pushed their spreads -- the gap between their yields and those of ultrasafe Treasury securities -- to a multidecade high, according to Merrill Lynch data. These bonds now yield 3.11 percentage points more than Treasurys on average, exceeding their recent March peak at 3.05 points.

That erases the improvement that took place from April to June, after investors were heartened that Bear Stearns's problems didn't topple the financial system.

Junk-bond spreads are also growing, but at 8.3 percentage points, the gap over risk-free Treasurys remains below March's high of 8.6 points. The current junk spread is still well under multidecade highs at 11 percentage points hit November 2002 -- the bottom of the tech-driven downturn that included large bankruptcies such as Enron and WorldCom.

The investment-grade bonds of banks, brokerage firms and other financial companies have suffered the most pronounced decline. Spreads on their debt have reached new highs as well, at 3.78 percentage points over Treasury bonds, significantly higher than the 3.62 point peak in March.

Investors and analysts are concerned about the ability of financial institutions to withstand the now yearlong pressures on their balance sheets from illiquid assets and deteriorating loans, a weakening economy and a mountain of debt coming due in coming quarters. Fears about the future of housing-finance companies Fannie Mae and Freddie Mac are also weighing on the market for corporate debt.

"I don't have an appetite for financial institution debt at all," says Tom Atteberry, partner at First Pacific Advisors LLC. "They are still early in the process of deleveraging," he adds, referring to financial institutions' raising capital and cutting back on borrowed funds in the wake of massive write-downs and losses.

Some financial institutions are selling their best assets to raise funds, a sign they have few options left for raising capital, says Mr. Atteberry. For example, Merrill Lynch & Co. recently sold its stake in Bloomberg LP, and Lehman Brothers Holdings Inc. is shopping pieces of its investment-management business, including parts of Neuberger Berman.

Indeed, one catalyst behind the recent decline in investment-grade corporate bonds, and financial-company debt in particular, was a string of bond sales last week by Citigroup Inc., American International Group and American Express Credit Corp. To sell a combined $8.25 billion in debt, all three companies had to pay investors significantly higher yields than what the firms had hoped. They paid 0.75 of a percentage point to one full point more than recent similar offerings by these companies, according to Thomson Reuters.

Most of those bonds didn't do well in secondary market trading. It surprised many investors, who worried that the trend might indicate deeper problems among the financials. Bankers say several financial firms postponed their near-term debt offerings until the fall after seeing the weak performance of last week's deals.

Financial institutions can't put off their fund raising forever. They have $660 billion of U.S. dollar-denominated long-term corporate bonds coming due in the next 12 months, the highest volume ever for such a period of time, according to J.P. Morgan Chase & Co. research.

"The market this August is as thin as we've ever seen it, and borrowers have had to pay very significant premiums to get investor focus," said Therese Esperdy, head of global debt capital markets at J.P. Morgan, adding that there's been a bit of a "downward spiral in valuations."

Investment-grade corporate bond issuance has also slowed with the market malaise this summer. After hitting a record level for corporate bond deals in May at $141 billion, June, July and August combined have seen only $106 billion in new investment-grade offerings, according to Thomson Reuters. Thus far this month, just $25 billion of such bonds have been slated for sale, a weak total even for the traditionally slow month of August.

FDIC Faces Balancing Act in Replenishing Its Coffers - WSJ

FDIC has to maintain a balance between replenish its deposit-insurance fund, which is being depleted under increasing bank bankrupticies, and not pushing more banks to the cusip of defaults by siphoning money from their cash-strapped coffer. FDIC will levey higher premium, probably less than 10 cents / dollar. Also FDIC might tap credit line from Fed Reserve once was bogged down with hard to liquidate assets.
WASHINGTON -- As financial institutions continue to fail, the Federal Deposit Insurance Corp. is under pressure to decide how to replenish the fund that insures consumer deposits.
The fund is stocked mostly by fees levied on U.S. banks. If the FDIC raises the fees, that would siphon more money from already cash-strapped financial institutions. It could also deplete funds that banks would otherwise use to make loans.
But if the FDIC moves too cautiously, the fund could run dry at a crucial time. That could hurt public confidence in the banking system and force the government to use taxpayer dollars to restock the fund. Meet in the Middle?
The agency could split the difference by raising premiums faster than most banks would like but slow enough so that the rebuilding of the fund takes years, not months.
The FDIC is likely to unveil its intentions in October.
The fund's $52.8 billion at the end of the first quarter was considered low by historical standards, covering 1.19% of all insured deposits.
Two bank failures in the second quarter are estimated to have cost the fund $216 million, and the four bank failures so far in the third quarter could have cost another $9 billion. The failure of IndyMac Bank in July may have wiped out more than 10% of the fund.
Such losses could easily push the fund below a 1.15% level, triggering a requirement that the FDIC come up with an action plan within 90 days to bolster the fund.
'The Mandate'
"Congress gave the FDIC the mandate to replenish the fund through higher premiums on the industry," said Art Murton, the FDIC's director of insurance and research. "The FDIC has some flexibility in setting premiums, which will require striking a balance between building the fund quickly and ensuring that banks have sufficient funds to support the credit needs of the economy."
The premiums charged by the FDIC may seem small, but they can be significant for struggling banks. The government has the discretion to levy higher fees on higher-risk banks, but those are the institutions that often can least afford it.
Most banks now pay the FDIC five cents for every $100 of insured deposits. Higher-risk banks are paying as much as 43 cents to insure $100 in deposits.
"To slam an eight-, 10- or 15-cent premium, that's going to cripple a lot of banks," said Camden Fine, chief executive officer of the Independent Community Bankers of America, a trade group.
Some analysts expect the FDIC to move aggressively despite such complaints.
"They don't want headlines suggesting the deposit fund is shrinking and inadequate," said Jaret Seiberg, a Washington analyst for the Stanford Group, a diversified financial-services company. "They need a fortress deposit-insurance fund." Mr. Seiberg said the agency could raise premiums on healthy banks to 15 to 20 cents for every $100 of insured deposits.
Government officials have gambled wrong before. In response to the Great Depression, Congress created the FDIC in 1933 and a separate agency called the Federal Savings and Loan Insurance Corp. in 1934. The FDIC insured deposits at banks, while the FSLIC backed deposits at savings and loans.
The S&L Crisis The savings-and-loan crisis in the late 1980s, which led to the closing of thousands of banks and thrifts, bankrupted the FSLIC, costing roughly $150 billion in mostly taxpayer funds to clean up the mess. The FSLIC was subsequently abolished and its funds brought under the FDIC's control.
The FDIC was created to instill confidence in the banking system and to prevent customers from panicking and rushing to withdraw money. Depositors are covered for as much as $100,000 on most accounts. The FDIC is ramping up its public-awareness campaign to assuage fears about the safety of deposits, partly in response to the hysteria that came after the failure of IndyMac.
In the 75 years that deposit-insurance funds have existed in some form, their combined balances have ended the year with less than 1.15% of the nation's deposits only 10 times, from 1986 to 1995.
The Premium Effect
Under a rule of thumb, raising premiums by one percentage point would bring in $700 million to the fund per year. Raising premiums 10 percentage points would generate $7 billion.
The FDIC has other options it has reviewed with Treasury Department officials, but these are seen as less desirable. For example, the FDIC could borrow as much as $30 billion from Treasury, an existing credit line that has never been tapped.
It could also borrow short-term cash from Treasury to cover payouts if banks fail, which could become necessary if the FDIC is bogged down with billions of assets from failed banks that are hard to liquidate.

Wednesday, August 20, 2008

non-agency MBS and CMO

--MBS is debt obgliation where issuers retain the onwership of underlying assets. Passthrough is a pro rata owernship interest, buyers retain the assets. ---non-agency passthrough, a pro rate ownership interest of a trust that pool together conventional loans that fail to meet size limit or other requirements. It needs credit enhancements, internal (senior/sub) or external. a.Credit enhancement on Jumbo A deals typically run three to four percent of the total. b.Credit enhancement on ALT A deals usually run four to seven percent. c.Credit enhancement can range from seven percent all the way up to twenty percent --non-agency CMO can be created from pool of passthrough or unsecuritized mortgage loans. But it is uncommon to have a nonconforming loan securitized to passthrough and then the passthrough carved up to a CMO. Usually a non-agency CMO is carved directly from unsecuritized (conventional) whole loans --non-agency MBS usually refers to non-agency passthrough or non-agency CMOs. --how CMO differs from MBS a.CMO lower level of collateral because CMO is evalued base on the PV of cashflows of mortgages not their market value, so no worry like MBS about the marketability or revaluation of collateral; b.senior/sub in CMO refers to cashflow distribution where non-agency passthrough structure is used for credit enhancements, cushining loss. c.CMO has high level of safety and credit ratings, usually AAA References: 1.US Master Bank Tax Guide,M1 2.

Fannie Mae Benchmark Bill program

Benchmark Bills® Through this program, Fannie Mae issues short-term notes in three- and six-month maturities on a set weekly auction schedule and one-year maturity on a set monthly auction schedule. While Benchmark Bills are a component of the regular Discount Notes program, they are unlike Discount Notes in that they are issued via a Dutch auction process using Web-based technology. The auction process creates greater price transparency in the primary market while the larger size of each issue adds secondary market liquidity for the benefit of investors. This system has improved market efficiencies as results are posted on a variety of electronic information sources (our Web site, Reuters, Knight Ridder, and Telerate) within a few minutes of the final outcome. As with Discount Notes, the Benchmark Bills program is conducted through the same group of dealers. Auction bids are obtained via the Internet, and the results of the auction are also announced through the Internet. By working with a designated group of dealers, Fannie Mae ensures an active secondary market for Benchmark Bills. Investors in Benchmark Bills receive the benefit of increased liquidity that only a dealer group can provide. Dealers submit bids either on behalf of investors or for their own accounts. Bids on behalf of investors may be competitive or noncompetitive, with noncompetitive bids allowed up to a maximum of 20 percent of a transaction. Settlement occurs on Wednesday (cash settlement) or on Thursday (regular settlement) at the option of the investor. Discount Notes and Benchmark Bills are considered acceptable collateral for margin deposits at various exchanges and clearing corporations. In certain instances, Discount Notes and Benchmark Bills are acceptable investments for escrow accounts associated with municipal bond offerings. In addition, Discount Notes and Benchmark Bills, like most other Fannie Mae debt products, are eligible as collateral in repurchase transactions entered into with the Federal Reserve Banks.

Tuesday, August 19, 2008

M3 Measure pointed to money supply contraction

--Supply M3 money supply contraction might lead to another leg down in credit market, intensifying the credit crunch. --But the author also cautioned against the M3 short term blips Sharp US money supply contraction points to Wall Street crunch ahead By Ambrose Evans-Pritchard The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months. Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959. "Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist. advertisement this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms. The growth in bank loans has turned negative to a halt since March. "It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein. Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare. The overall debt burden in the US economy is currently at record levels, raising concerns that a recession - if it occurs - could set off a sharp downward spiral. Household debt is now 131pc of disposable income, compared with 93pc at the top the dotcom bubble, 79pc in the property boom of the late-1980s, and 62pc at the end of the 1970s. The M3 data measures both cash and a wide range of bank instruments. It tends to provide an early warning signal of major shifts in the economy, although the US Federal Reserve took the controversial decision to stop reporting the statistics in 2005 on the grounds that the modern financial system had rendered the data obsolete. Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation. "There are always short-term blips but over the long run M3 has repeatedly shown itself good leading indicator," said Mr Stein. He cautioned that the three-month shifts in M3 can be highly volatile. M3 surged after the onset of the credit crunch, but this was chiefly a distortion caused by the near total paralysis in parts of the American commercial paper market. Borrowers were forced to take out bank loans instead. The commercial paper market has yet to recover. The University of Michigan's index of consumer sentiment has fallen to the lowest level since the 1980s recession. The US economy is without doubt facing severe headwinds going into the autumn. Richard Fisher, the ultra-hawkish head of the Dallas Federal Reserve, warned over the weekend that growth would be near "zero" in the second half of the year. M1 (narrow money, currency plus demand deposits) and M2 (M1 plus time deposits, savings accounts, and non-institutional money market funds), it stopped reporting M3 (M2 plus large time deposits, institutional money market accounts, and short-term repos)

Sunday, August 17, 2008

AIG is not out of woods yet

Q2 earning highliths --total rev 20 bil vs 31 bil last year, net income -5.4 bil vs 4.3 bil last year --net realized capital loss 6 bil; unrealized market valuation loss on AIGFP super senior credit default portfolio is 5.6 bil Analysis --The bulk of net realized capital loss goes to other-than-temp impairment. Majority of impairment is from security lending portfolio, whose existing exposure to Mortgage and Assete backed invested collateral is around 36 bil vs 41 bil Q1 08. This might weigh on the company earnings if housing market continue to worsen. --The exposure of AIGFP super senior credit default portfolio might be another bomb. The FV of the portfolio in Q2 08 is around 26 bil. But its notional amount is ~447 bil. Highly probably AIG is on the long risk side. If financial market condition deteriorates and more companies go defaults on their deb obligations, AIG will have a cold feet. --The company fundamental is not looking so bright. Its CDS exposure along might suffer another loss of around 10 bil, assuming 8% default and 40% severity loss. --Short the company debt and equity.

Saturday, August 16, 2008

When will US Housing Market Bottom Out

Housing market is one of fundamental factors driving the credit crunch and US economy. To get a pulse of its tipping point will help us time the market.
Greenspan pointed out that US housing market will bottom out in the first half of 2009. Two pillars of his proposition are supply of housing inventory and price-rent equilibrium.
He insisted that the price-rent is dislocated and will revert back to an equilibrum when market bottom out. As indicated by the chart, US Home Price-Rent (PE) ratio, has been hovering around 0.5 since 1987 until 2002. Since correction has started since the begnining of 2006 when hte PE level peaked at 0.9 and has slide below 0.7. According to this pace, it will revert back to 0.6 by the end of this year and pass 0.5 by the first half of next year.

Thursday, August 14, 2008

five theories of JPM's one day freefall

Late Monday, J.P. Morgan Chase, one of America’s pre-eminent banks, disclosed an incremental $1.5 billion loss related to residential mortgages since the end of its second quarter. Its shares plummeted 9.5% Tuesday, wiping out more than $12 billion of market value. Other big U.S. financial stocks lost another $50 billion in value on top of that. A disproportionate and panicked response? That depends on your theory of why the shares actually fell. There are certainly no shortage of explanations. In fact, there are so many that J.P. Morgan’s one-day freefall makes a good case study on the futility of predicting the behavior of stocks. Let’s have a look at some of these theories and the arguments for and against them. Theory No. 1: The 10Q Spooked Investors The cautious, downcast language used by J.P. Morgan in the “forward-looking statements” section of Monday’s 10Q filing scared already jittery investors. Quick housing rebound? Nope. Losses in the commercial mortgage-backed securities markets? Probably. For: The 10Q is the best proxy for J.P. Morgan’s view of its business. When they say there is no bottom in the U.S. housing market, it is more evidence for a negative Wall Street to stay negative. Against: It is a 10Q, for goodness sakes. What is the upside for Jamie Dimon to sound bright or optimistic in a 10Q filing? “Underpromise, overdeliver” is the mantra for all CEOs wanting to keep their jobs–even when it comes to the 10Q. Theory No. 2: Prominent Analyst Claims Failure of Strategy Bank analyst Dick Bove published a note on Tuesday morning titled, “JP Morgan Chase: The Original Concept Is Not Working,” lowered his per-share earnings estimates through 2010 and cut his price target on the stock to $39 from $43. For: When Bove yells fire, investors run. He appears on CNBC all the time, is fiercely independent and has made a number of good calls. BankAtlantic’s recent lawsuit against him has actually added to his “street cred.” Against: Bove’s “maintain neutral” rating on J.P. Morgan didn’t change. And he didn’t cut either his estimates or price target by much. The thrust of his note’s argument, that the merger of J.P. Morgan and BankOne was strategically flawed, is almost irrelevant to the company’s current predicament. Theory No. 3: Trio of Analysts Turns Against Goldman Before the open Tuesday, three “star” analysts–including curmudgeonly “star” Bove, glamorous rising “star” Meredith Whitney and old-school “star” Michael Mayo–all downgraded the starriest of the star stocks, Goldman Sachs. For: Goldman occupies a hallowed place in minds of investors. If Goldman is now infected by the bear, Wall Street is convinced that no competitor, not even J.P. Morgan can be free of the contagion. Against: The Goldman calls are irrelevant. Goldman has consistently made research analysts who cover it look like nail-biting chumps. Besides, owning the stocks has a different logic. J.P. Morgan is a play on the resolution of the credit crisis. Goldman Sachs is a play on increased capital-markets activity. Theory No. 4: The Usual Correction on Profit-Taking J.P. Morgan stock bottomed at $29.24 on July 15. Monday, it traded as high as $42.81, an astonishing 46% increase from that recent low. It was an increase of nearly $50 billion in J.P. Morgan’s market value. Monday’s announcement of the losses provided a convenient pretext for investors to take profits. For: Occasional sharp corrections are an inevitable part of the bottoming process for beaten-down stocks. Investors believe the bottom was put in on July 15. That doesn’t mean the stock will continue uninterrupted upward. Against: Very few investors actually bought in at the July 15 low. Most prices paid for JP Morgan in the first half of July were close to $35. And in the second half of July and this month, prices were closer to $40. How much profit can there be? Theory No. 5: Wall Street’s Fast Money Goes Short Momentum investing rules Wall Street. Trading desks and hedge funds dominate day-to-day stock trading. Once J.P. Morgan’s shares were seen as vulnerable on Tuesday morning, the traders jumped aboard and pounded the stock. The imminent lifting of the SEC’s short rule restrictions (at midnight Tuesday) may have also emboldened the shorts. For: Stock prices on a given day are determined by traders not investors. Traders drive the volume. The recent report that GLG trader Greg Coffey turned his $5 billion portfolio over more than twice a day in May may be an extreme manifestation, but it is telling nonetheless. Against: J.P. Morgan’s daily stock price mirrors investor views on the prospects of J.P. Morgan and the credit markets. It isn’t a reflection on what hedge funds can do with their computers. Remember that J.P. Morgan’s shareholder base mostly is comprised of long-term institutional investors. So, that is five theories for J.P. Morgan’s decline Tuesday. There are undoubtedly more. The beauty of Wall Street is that it is impossible to conclusively prove any of them. And it probably doesn’t matter. The stock market will always be a mix of right and wrong theories, of the predictable and unpredictable, the known and unknown. In the end, only one thing matters. The price of a stock. Which is what it is. And today, J.P. Morgan is down another 3%.

Greenspan Sees Bottom In Housing, Criticizes Bailout - WSJ

Alan Greenspan usually surrounds his opinions with caveats and convoluted clauses. But ask his view of the government's response to problems confronting mortgage giants Fannie Mae and Freddie Mac, and he offers one word: "Bad." In a conversation this week, the former Federal Reserve chairman also said he expects that U.S. house prices, a key factor in the outlook for the economy and financial markets, will begin to stabilize in the first half of next year. "Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," he said in an interview. Tracing a jagged curve with his finger on a tabletop to underscore the difficulty in pinpointing the precise trough, he cautioned that even at a bottom, "prices could continue to drift lower through 2009 and beyond." A long-time student of housing markets, Mr. Greenspan now works out of a well-windowed, oval-shaped office that is evidence of his fascination with the housing market. His desk, couch, coffee table and conference table are strewn with printouts of spreadsheets and multicolored charts of housing starts, foreclosures and population trends siphoned from government and trade association sources. An end to the decline in house prices, he explained, matters not only to American homeowners but is "a necessary condition for an end to the current global financial crisis" he said. "Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world's mortgage-backed securities. We won't really know the market value of the asset side of the banking system's balance sheet -- and hence banks' capital -- until then." At 82 years old, Mr. Greenspan remains sharp and his fascination with the workings of the economy undiminished. But his star no longer shines as brightly as it did when he retired from the Fed in January 2006. Two Pillars of Data Mr. Greenspan has been criticized for contributing to today's woes by keeping interest rates too low too long and by regulating too lightly. He has been aggressively defending his record -- in interviews, in op-ed pieces and in a new chapter in his recent book, included in the paperback version to be published next month. Mr. Greenspan attributes the rise in house prices to a historically unusual period in which world markets pushed interest rates down and even sophisticated investors misjudged the risks they were taking. His views remain widely watched, however. Mr. Greenspan's housing forecast rests on two pillars of data. One is the supply of vacant, single-family homes for sale, both newly completed homes and existing homes owned by investors and lenders. He sees that "excess supply" -- roughly 800,000 units above normal -- diminishing soon. The other is a comparison of the current price of houses -- he prefers the quarterly S&P Case Shiller National Home Price Index because it includes both urban and rural areas -- with the government's estimate of what it costs to rent a single-family house. As other economists do, Mr. Greenspan essentially seeks to gauge when it is rational to own a house and when it is rational to sell the house, invest the money elsewhere and rent an identical house next door. "It's the imbalance of supply and demand which causes prices to go down, but it's ultimately the valuation process of the use of the commodity...which tells you where the bottom is," Mr. Greenspan said, recalling his days trading copper a half century ago. "For example, the grain markets can have a huge excess of corn or wheat, but the price never goes to zero. It'll stabilize at some level of prices where people are willing to hold the excess inventory. We have little history, but the same thing is surely true in housing as well. We will get to the point where there will be willing holders of vacant single-family dwellings, and that will no longer act to depress the price level." The collapse in home prices, of course, is a major threat to the stability of Fannie and Freddie. At the Fed, Mr. Greenspan warned for years that the two mortgage giants' business model threatened the nation's financial stability. He acknowledges that a government backstop for the shareholder-owned, government-sponsored enterprises, or GSEs, was unavoidable. Not only are they crucial to the ailing mortgage market now, but the Fed-financed takeover of investment bank Bear Stearns Cos. also made government backing of Fannie and Freddie debt "inevitable," he said. "There's no credible argument for bailing out Bear Stearns and not the GSEs." His quarrel is with the approach the Bush administration sold to Congress. "They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted -- with necessary taxpayer support to make them financially viable -- as five or 10 individual privately held units," which the government would eventually auction off to private investors, he said. Instead, Congress granted Treasury Secretary Henry Paulson temporary authority to use an unlimited amount of taxpayer money to lend to or invest in the companies. In response to the Greenspan critique, Mr. Paulson's spokeswoman, Michele Davis, said, "This legislation accomplished two important goals -- providing confidence in the immediate term as these institutions play a critical role in weathering the housing correction, and putting in place a new regulator with all the authorities necessary to address systemic risk posed by the GSEs." But a similar critique has been raised by several other prominent observers. "If they are too big to fail, make them smaller," former Nixon Treasury Secretary George Shultz said. Some say the Paulson approach, even if the government never spends a nickel, entrenches current management and offers shareholders the upside if the government's reassurance allows the companies to weather the current storm. The Treasury hasn't said what conditions it would impose if it offers Fannie and Freddie taxpayer money. Fear that financial markets would react poorly if the U.S. government nationalized the companies and assumed their approximately $5 trillion debt is unfounded, Mr. Greenspan said. "The law that stipulates that GSEs are not backed by the full faith and credit of the U.S. government is disbelieved. The market believes the government guarantee is there. Foreigners believe the guarantee is there. The only fiscal change is for someone to change the bookkeeping." Cloudy Crystal Ball In the past, to be sure, Mr. Greenspan's crystal ball has been cloudy. He didn't foresee the sharp national decline in home prices. Recently released transcripts of Fed meetings do record him warning in November 2002: "It's hard to escape the conclusion that at some point our extraordinary housing boom...cannot continue indefinitely into the future." Publicly, he was more reassuring. "While local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity," he said in October 2004. Eight months later, he said if home prices did decline, that "likely would not have substantial macroeconomic implications." And in a speech in October 2006, nine months after leaving the Fed, he told an audience that, though housing prices were likely to be lower than the year before, "I think the worst of this may well be over." Housing prices, by his preferred gauge, have fallen nearly 19% since then. He says he was referring not to prices but to the downward drag on economic growth from weakening housing construction. Mr. Greenspan urges the government to avoid tax or other policies that increase the construction of new homes because that would delay the much-desired day when home prices find a bottom. He did offer one suggestion: "The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants," he said. The only sustainable way to increase demand for vacant houses is to spur the formation of new households. Admitting more skilled immigrants, who tend to earn enough to buy homes, would accomplish that while paying other dividends to the U.S. economy. He estimates the number of new households in the U.S. currently is increasing at an annual rate of about 800,000, of whom about one third are immigrants. "Perhaps 150,000 of those are loosely classified as skilled," he said. "A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale -- and hence help stabilize prices."