Thursday, November 29, 2007

Citibank raised the cost of the solution.

Is CitiBank now a junk bank based on their cost of replacing their capital?

On Monday, Citibank sold a stake in the bank for $7.5 billion dollars. They paid the investor 11% dividend for about 5 years. The bank needed to replace some of the capital they wrote down in the subprime mess. Because Citi was the first they set the benchmark for others to follow, it appears to me that Citi is either in much worse shape then they have let on, or they were had based on the cost to other banks this week. As I was speaking to a client on Wednesday I said, at the price Citi paid it now becomes a “JunkBank”.

As other banks and mortgage provides were looking to raise money they had to pay more than they thought they would have to pay. Barclays bank came to the market today with a QDP preferred at 7.75%. Freddie Mac the second largest mortgage buyer came today with a non-convertible preferred at 8.38% yield.

Citi paid 2.79 times the yield on the 10-year T Bond

IThe 10-year Treasury Bond its yield today is 3.94%. If you look at what these banks had to pay to rebuild capital, it was very expensive. Barclays paid 1.96% times the 10-year T-Bond rate and Freddie Mac paid 2.12 times the 10–year rate. On the other hand, Citi paid 2.79 times the 10-year rate.

The risk premium in the credit markets has expanded, perhaps much wider than it should be, only time and more disclosure will tell if these were in fact the right prices.

Dan Perkins

Dogging the SIV Part 2

SIV Update

SIV holdings have fallen at least $75 billion since July to $320 billion, as the companies were unable to borrow. The net asset value of SIVs has fallen to 69.7 percent from 100 percent in July, according to Fitch Ratings. As I explained yesterday the banks like Citi that has $83 billion in SIV is caring the value at par. The bank has not taken down the value of these SIV, at least for now.

Home Equity in Trouble

Wells Fargo announced yesterday that they were taking a $1.4 billion write down on their home equity portfolio. To my knowledge, I know of no other bank that has reported problems with home equity. What is significant about this write down is that most home equity is help by the originating institution and not always securitized. A wave of write-offs in home equity will slow the economy. My guess with this $1.4 billion write down Wells Fargo will tighten its credit standards and it will make less home equity loans.

Home Price Fall Again

The consumer has been tapping their home equity in order to continue his lifestyle. With a 5.45 decline in the value of housing on a year over year basis reported yesterday by the National Association of Realtors the consumer will find they have less equity in their home. With less equity and higher standards, the consumer has less money to spend slowing consumer spending means a slower growth rate in the economy.

Unemployment and the Fed

We had a big jump in the number of new claims for unemployment benefits today and now the focus will turn to the November employment data, which will be reported on Friday the 7. The outcome of this report will likely have a significant impact on the Fed interest rate decision on December 11. Without the jobs, number the market sees over a 100% chance of the Fed cutting by 25 basis points. Some people point to the fact that today the 90 T-Bill rates is under 3% while the current Fed Funds Rate is 4.50% to show how far behind the Fed is on the rate curve. I suspect that unless we see an ugly number next Friday the Fed will only go 25 basis points and then another 25 in January

Equity Market

If the markets close on the upside, today I expect a bear squeeze tomorrow and the bears will have to start covering their short positions. Look for this market, not all at one time, to test the highs before the end of the year.

Dan Perkins

Wednesday, November 28, 2007

Watch out for the oncoming SIV not the SUV

Last week I brought to your attention the potential problems with Special Investment Vehicles (SIV). These investments are not currently on the balance sheets of the banks or investment banks. The result of this off balance sheet financing is that nobody knows for sure how much is out there. I thought it might be important to get some information to you so as more and more information comes out about SIV you are knowledgeable. I have collected information from several sources about SIV to give you diverse background.

Offshore Companies

SIVs are typically offshore companies created by banks and other firms to sell short-term debt to buy mortgage securities and finance company bonds with higher yields. They profit on the spread between the two.

Banks such as New York-based Citigroup, which manages $83 billion in SIVs, collect fees for running SIVs while keeping their contents off the bank's books. SIVs finance themselves by selling asset-backed commercial paper, or short-term loans backed by collateral such as mortgages.

When the subprime debt market blew up in August, investors stopped buying SIV commercial paper. As a result, in September and October, SIVs didn't have the cash to pay debt holders of more than $8 billion of their paper.

The banks had also peddled SIV paper to their clients, including state officials who oversee pools of taxpayer funds like Florida's. The $27 billion Florida pool, the largest in the U.S., has invested $2 billion in SIVs and other subprime-tainted debt, state records show. About $725 million of these holdings have already defaulted.

Yesterday, Governor Charles Crist held a public meeting disclosing that 4 percent of the state's short-term investments, including those in the state pool, had been downgraded by credit rating companies.

`Would be Devastated'

State pool losses may hit taxpayers in places like Jefferson County in the form of reduced services or higher taxes.

Jefferson County's Wilson says he still trusts the Florida pool managers and will keep the school's money in the fund. ``I really hope this isn't any worse than we know today,'' he said after the Nov. 14 meeting. ``If something happened to that investment, our county would be devastated.''

State officials have no business putting taxpayer money into debt investments that have baffled even the most seasoned Wall Street executives, says Joseph Mason, finance professor at Drexel University in Philadelphia and a former economist at the U.S. Treasury Department.

Municipalities shouldn't be playing like they're expert investors, squeezing the last penny out of SIVs,'' Mason says. ``They're making a giant jump into a new product area which has unknown, unforeseen risks.''

Cheyne Default

Thousands of school, fire, water and other local districts across the U.S. keep their cash in state- and county-run pools. These public accounts, modeled after private money market funds, are supposed to invest in safe, liquid, short-term debt such as U.S. Treasuries and certificates of deposit.

All told, there were about 100 such pools, containing more than $200 billion at the end of 2006, according to Westborough, Massachusetts-based iMoneyNet, a research firm that tracks these funds.

Public fund managers say they've bought SIV debt because it had the safest credit ratings and offered higher yields than other short-term fixed-income investments.

SIVs, many of which are assembled by London-based bankers, had a low profile until some of them collapsed. The $7 billion Cheyne Finance SIV, incorporated in Delaware, defaulted on Oct. 17.

`High-Risk Investments'

Among the places caught up in the SIV and subprime snarls are Connecticut, Florida, Maine, Montana and King County, Washington. Public funds hold $1 billion of defaulted asset- backed commercial paper, including $273.5 million from SIVs. Montana entrusted $465 million, or 19 percent of its $2.5 billion investment pool, to SIVs.

Someone once said that"if it sounds to good to be true then it must be." As people shopped for yield they didn't ask the question, "What are they doing with my money to get a higher return?" When thing went bad we always hear the same statement, "Nobody told me the risk I was taking."

Dan Perkins

Monday, November 26, 2007

Will we ever hear the Fat Lady sing?

Today was another brutal day for those of you in the markets, if you are heavy into stocks waiting for a chance to get out with a bounce. A positive day if you only owned Treasuries. (None of us has enough: well except Noelle) Most people own some Treasuries, but not enough and as each day sees a decline in the stock market, we wish we had more.

One down two to go

The S&P 500 index turned negative as of today in terms of price for the year-to-date time-frame. The Dow Jones is less than 300 points from turning negative for the year and the NASDAQ is within 90 points of turning negative. Could the latter find new lows tomorrow? At some point in time, I would expect a bounce just because the sellers will run out of steam. When will that happen? Your guess is as good as mine is. We are in a momentum market now the momentum is negative and something has to turn the momentum.

Bonds Smoked

Up until today, all the action was in the short-end of the Treasury market but look at the results as of the close today. The 30-year T-Bond was up two and seventeen thirty-seconds, this is a huge move and one of the largest I have seen in a long time. Look at the yield on the rest of the curve. The 10-year is approaching 3.75%, which would be significant if we had a housing market.

2-Year 3.625 10/31/2009101 2.89 103/4

3-Year 4.5000 5/15/2010103-30 2.84 14 .

5-Year 3.875 10/31/2012102-31 3.21 28.

10-Year 4.250 11/15/2017103-11 3.84 1-10

30-Year 5.000 5/15/2037111-29 4.28 2-17

What if the Treasury doesn't expand the supply of 90-day T-Bills

As long as the bond market continues to rally as it has with a flight to quality, the equity market will continue to be volatile. At some point in time, the bond market will run out of gas like the stock market and there will be more pain. The short end of the yield curve will have the least amount of pain for investors, but what happens if the Treasury does not offer any more bills?

If you wanted to fund long-term obligations and you look at the yield above were would you want to sell bonds? One thing going on in the background that not many people are talking about is the declining Federal Budget deficit. Do not be surprised that sometime soon the Fed says they are only going to rollover the existing T-bills and not add to supply.

The demand will out strip supply and we could see the 90-day T-Bill below 3%. Keep in mind that momentum does run its course and this to will pass it will just take time. These market gyrations sure make it difficult to go Christmas shopping when your portfolio just went down again. Look at what you own if it was good when you bought and after review, it is still good then keep it you do not need to participate in a fire sale.

Dan Perkins

Saturday, November 17, 2007

Wells Fargo says Housing worst since the "Great Depression"

Up 360 and then give it away

The volatility bandwagon continues to roll on Wall Street. The market was up one day this week over 360 points and then we gave almost all of it back the rest of the week. On Thursday the Treasury added $48
billon dollars liquidity to the system and this amount was the largest infusion by the Treasury in history, even greater than the infusion after 9-11, you remember September 11, 2001.


Not to be out done by the Treasury, Wells Fargo, one of the largest mortgage originators in the nation, said that the housing decline was the worst since the “Great Depression”. The markets are still trying to get a handle on the magnitude of both the sub-prime and housing problems. Goldman said on Friday that they figure that when it is all said and done the impact of the sub prime and housing issues will mean a loss of about $2 trillion dollars.

This past week I had the opportunity to teach a class at Florida Southern University in The School of Journalism. The subject of my class was “Is the sub prime problem a cover for the real problem in housing’? I think the sub prime issue is the result of greed by many players in the housing sector.


"Greed is Good"



In the movie “Wall Street”, the most famous quote about Wall Street is “Greed is good”. If you think of Greed as a pendulum that swings back and forth, at the height of the housing bubble the Greed pendulum had moved to far in one direction. As we learned in high school physics class every, action has an equal and opposite reaction. The pendulum is swinging back towards the middle and it will probably swing to far the other direction before it is all said and done.

We had a scare again in the credit markets this week in money market accounts. Legg Mason reported that it had to infuse over $300 million in two of their money market accounts to keep the par value of one dollar. On the other hand GE Capital broke the $1.00 level when it reported that it had sub prime asset backed paper in their money market account. The last reported price for the fund was $.96.

The big question face investors between now and the end of the year is were will the $ 2 trillion in short-term money market investments go when they rollover? When the markets go up we seem to think that the problem with the credit markets is over and then something like the events of this week and the markets fold as fear takes hold again and people don’t know what to do with their money.


90 Day T-Bill could break 3% by year-end


I think the demand for short Treasury Bills will be high for the rest of the year. If another shoe were to drop more and more people will run to the short end of the n curve and put tremendous downward pressure on short interest rates. The old law of supply and demand is at play for now in the short-term credit markets. We may well see the 90 day T Bill yield below 3% by the end of the year



Dan Perkins

Friday, November 9, 2007

Don't try and catch a falling knife

Shoeshine boys were giving stock tips

Stay off the ledge, regardless of how high it is off the ground. In the 1930's when the stock markets crashed, some people jumped out of buildings because they lost everything speculating in the stock markets. Prior to the crash the shoeshine boy were giving stock tips.

Go out and do some Christmas shopping

I am not saying that we are in another 1930’s crash, but we are in a great deal of turmoil now with a bias to the downside. The best thing you can do now is go out and do some Christmas shopping. I do not believe that you should sell at this level or even if the markets goes down further, you should sell then, this is not the environment to make sell or for that matter, some buy decisions.

You have to look at what you own and make a decision as to the prospects of the company in a different economic environment. If the bulk of your money is in quality fixed income then spend a little more on Christmas. If on the other hand you have raised a significant amount of cash and you are looking for something to buy go out and do some Christmas shopping

Income tax of 15%

Tax qualified stocks, including preferred, offer a maximum income tax of 15% regardless of your tax rate on other income. Therefore, if you have to pay 38% on other income and only 15% on tax qualified investments you can see why tax qualified investments would be attractive.

Triple tax-free bond at an interest rate of 5.10%

I recently purchased some Puerto Rico triple tax-free bond at an interest rate of 5.10%. These are zero coupon bonds so they pay no current income but appreciate over time. You buy a zero coupon at discount, something less than face amount and then at maturity you get the face amount. In this example, I paid 9.5 cents on the dollar. If I hold the bond until maturity then I will get just over 10.5 times on my money.

If you look around you will find things to do with your money, even in difficult times like today. Picking what stocks to buy could be difficult, a friend of mine said he liked a stock and bought some last week, bought some more at a lower price early this week and today he can buy it at an even better price.

In turbulent times as we are experiencing now, sometimes the baby gets thrown out with the bath water. As I said above, look at what you own, if you still like it and you have the cash, then average down and take the reduced price as an early Christmas gift and buy more.

If you do not own a stock and do not know anything about it, then read the headline, and do not try to catch the falling knife of picking a stock to buy in today’s market. The cut could be deadly to your financial health.

Dan Perkins

Thursday, November 1, 2007

Highlights from RealtyTrac Inc Report on Foreclosures


  • One property can have more than one mortgage and therefore more than one foreclosure notice
  • A total of 446,726 homes nationwide were targeted by some sort of foreclosure activity from July to September, up 100.1 percent from 223,233 properties in the year-ago period, according to Irvine-based.
  • The current figure was 33.9 percent higher than the 333,731 properties in foreclosure in the second quarter of this year.

  • There was one foreclosure filing for every 196 households in the nation during the most recent quarter

  • In all, 635,159 filings were reported in the third quarter, up 99.5 percent from the year-ago quarter and up 30 percent from the second quarter of this year.

  • RealtyTrac reported that three states with the highest foreclosure rates during the third quarter were Nevada, California and Florida.

  • Nevada reported one foreclosure filing for every 61 households, with 16,817 filings on 12,982 properties.

  • California led the nation in total foreclosure filings and reported one filing for every 88 households. The state had 148,147 filings on 94,772 properties, an increase in filings of 36 percent from the previous quarter and nearly four times more than the year-ago period.

  • In Florida, there were 86,465 foreclosure filings on 60,992 properties. Foreclosure filings rose 51.5 percent from the previous quarter and more than doubled from the same quarter last year.

  • Florida's foreclosure rate amounted to one filing for every 95 households.

The bottom line is that based on these number reported from RealtyTrac Inc. the implosion in the housing market seem to be accelerating rapidly.

Dan Perkins