Daily Comment
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Daily Comments for 8/21st
The continued jolt to the credit markets is just what the economy has needed to bring it back to reality. The blowup of the sub-prime market and the shaky financial assets associated with them have convinced investors and market participants that thereʼs a lot more risk out there than previously thought. The repricing of risk is making credit more costly for a variety of borrowers and raises questions as to the longer term effects on the economy. Ultimately, I believe that this historic revaluation of risk may be the event that was needed to extend the life of this business cycle by reining in the excesses that cheap money provided. For now, reports will continue to get worse. Hereʼs what happened today..
· As I mentioned in my last posting, the Federal Reserve lowered the discount borrowing rate last Friday in an event to calm the markets and encourage lending between banking institutions. In a statement released today, policy makers donʼt expect to know for days whether the reduction helped ease credit concerns.
· U.S. homes facing foreclosure almost doubled in July as property owners with adjustable-rate mortgages saw their payments rise and were unable to refinance because of the sub-prime crisis. Lenders sent 180k notices of default, scheduled auctions or bank repossessions last month, a 93% increase from a year earlier. National Association of Realtors reported that an increase in foreclosures will add more homes to the market and further erode values. U.S. home sales have dropped to a four year low in the second quarter. Forty-three states have seen year-over-year increases in foreclosure activity.
· Federal Reserve Bank of Richmond President Jeffrey Lacker said that the impact of the financial turbulence on the broader economy will determine decisions made by the Fed. His speech followed a meeting by Fed Chairman Ben Bernanke with Senate Banking Committee Chairman Chris Dodd. Bernanke agreed to use all the tools at his disposal to restore much needed stability in financial markets. Lacker stated that recent data on actual housing market activity has dampened his optimism about a bottoming out in the industry. Consumer spending and business investment should offset the real estate market as the prospects for income growth remain strong.
· Toll Brothers was downgraded ahead of earnings, as worries rise that rising problems in the market for large mortgages would hit the luxary home builder. Bank of America provided the downgrade. As of this writing the homebuilder was down 5 percent. Lennar, the nationʼs largest builder by revenue, reported a loss rather than the forecast narrow profit in its most recent quarter. Overall, a survey by the National Assocaition of Home Builders found its members confidence in the market at a 16 year low in August.
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Credit Market Comments
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Market Comments
For over the past month market conditions in the credit markets have deteriorated on a daily basis from troubling (month ago), to ugly (week ago) to outright panic (all this week). I support that fact that the Federal Reserve has been quiet, preferring to let the markets work out their problems on their own. Lowering the Federal Funds rate will only complicate the issues that got the markets to the point in first place, cheap money! That being said, the upheaval will no doubt have some implications for the real economy and there remains a risk that liquidity conditions will become so bad the Fed will have to ease to bolster confidence. Today alone (8/16), the Fed unexpectedly lowered the discount borrowing rate between banks by .50bps to 5.75 and said it stands ready to "act as needed" to keep credit market losses from sapping economic growth. The markets will continue to evaluate the deterioration and wait to see at what level the Fed would have to intervene. Stay tuned….
Highlights from the week:
- St. Louis Federal Reserve President William Poole made no secret of his opposition to any Fed rate cut unless there is some sort of calamity taking place to make a decision in between meetings. The next scheduled Fed meeting is Sept. 18th.
- The Federal Reserve pumped more than $33 billion into money markets over the past week, helping drive the Benchmark U.S. rate below policy markers official Benchmark (5.25%). This infusion hasn't done much to give companies access to capital.
- Financial stocks in the U.S. and Europe have fallen to almost the same level or below the lowest in the past 15 years relative to earnings. S&P 500 Financials Index has lost 8.3% since July.
Start of the Week:
· Treasury bills (1yr and in maturities) have fallen the most in nearly two decades on further speculation that the Federal Reserve will move to cut borrowing costs next months. Investors have begun to flee even money market funds, considered the safest of instruments, on concerns that these funds hold risky collateralized debt obligation back by sub prime loans.
· Countrywide Financial Corp., the biggest U.S. mortgage lender, was downgraded to "underperform" by Keefe, Bruyette & Woods, which said a liquidity crisis has spread to the company's bank deposits.
· Countywide, reducing cost as part of its effort to weather a credit crunch, had begun laying off employees involved in originating loans. The layoffs occurred in the company's Full Spectrum Lending unit, which handles many home mortgages in the Alt-A category.
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