Monthly Archives: June 2007

Delay in Downgrades

This article starts to shed more light on why the rating agencies may be taking so long to downgrade the $000′s of B’s in CDO’s downstream from the subprime explosions. Because their original ratings are based on expectations of reality, it takes a change in reality (i.e. a home actually being sold through foreclosure for less than the value of the bond) for them to admit defeat. Otherwise any downgrade is just a further specualation on the future…

A weak and unconvincing argument (aren’t all ratings just expectations?), but at least there is some “logic” to it. Problem is this just delays the inevitable.

S&P, Moody’s Hide Rising Risk on $200 Billion of Mortgage Bonds

The one agency that seems to have acted: Fitch Ratings Downgrades 5 & Places 8 Countrywide ABS 2006-SPS1 Classes on Rating Watch Negative was also recently eliminated as a rating source for the Fed. Go figure.

Bullishness Abroad

The Chinese Economy has been the topic of conversation of probably way too many cocktail stock talks…however, the upcoming Olympics suggest that if the government has anything to say about it, the boom won’t stop just yet.

The growth and low cost-structure present margins across industries unseen domestically. Here is an overview of a few:

Profitability Ranking of U.S.-Listed Chinese Stocks

As with any one metric, these should be taken with a grain of salt, but even with a handful of sodium these margins look juicy. A nice respite from the credit woes in the USA…

Bridge to ???

The recent peak in the buyout boom has been funded not only with equity from the historically massive funds raised in the last few years by the behemoths at the large private equity shops but also by the credit market’s willingness to absorb the high yield bonds funding up to 80% of these acquisitions.

If this headline is any indication, the troubles in the rest of the credit market may be challenging the continuing surge in this space, as at least in this deal, it sounds like the banks who agreed to bridge the acquisition debt do not have an easy exit…

Bonds Becoming Tougher Sale

One of the “catalyst” scenarios I have speculated about (probably with one of you) involves a series of bridge-loans gone bad, where banks are forced to retain loans that they previously thought would be absorbed by the market – and are forced to bear the loss when the underlying credit turns south.

Stay tuned…

Some Things Speak for Themselves

CDOs in `Hooker Heels’ Fool Moody’s, S&P, Gross Says

From Gross’s Letter (below): “To death and taxes you can add this to your list of inevitabilities: the subprime crisis is not an isolated event and it won’t be contained by a few days of headlines in The New York Times.”

Looking for Contagion in All the Wrong Places

Optimism About the Weather

Being a contrarian can sometimes have positive results…like believing we will have a second consecutive slower than expected hurricane season:

Where are All the Hurricanes?

Or that maybe we will have global cooling before global warming melts all our ice-caps:

Global cooling effect

Maybe I am just an optimist about the weather…or maybe I have spent too much time here in the paradise of southern cali. Hard to say.

Downgrades Downstream

The agencies have acted at the mortage-backed level, suggesting more action at the CDO level is only a matter of time.

http://biz.yahoo.com/rb/070625/goldmansachs_subprime_downgrades.html?.v=2

That this many have been downgraded this quickly by the reactionary agencies suggests momentum may be pushing things up the credit stream faster than some anticipate…time will tell.

A like-minded scenario is further explored here, where the writer summarizes the integration and coordination of the rating agencies in the CDO underwriting process.

http://biz.yahoo.com/seekingalpha/070625/39290_id.html?.v=1

This chart mentioned in the above article may point in the direction we may be headed:

http://www.markit.com/information/affiliations/abx/history

Some Like Clarity

One of my professors reacted in the same way to a study originally uncovered by a colleague, which only further supports the darker themes underlying the cracks in the system. For those who like clear explanations you might enjoy this read:

Multiplying Mortgage Trouble

And the Trend is…

Another week and another set of data on the underlying weakness in the housing market:

Home Sales Hit Slowest Pace in 4 Years

Housing sales are falling, prices are falling, and inventories are rising. This does not bode well for the holders of the CDX’s and relatives down the chain from these fundamentals. Although Bear’s bail-out may have bandaged the bleeding of it’s former juggernaut (aka beta-rider), the no-name funds chasing the same strategy will not be as lucky.

The interesting question outstanding for me is when and how the rating agencies react to the latest mess. It seems almost unconscionable that there was not a wave of downgrades leading up to this latest crisis, but harkening back to the go-go days of the Independent Power Producers in the pre-Enron implosion era reminds one of the reactionary nature of that privately funded group of “watch dogs”. It took Enron going-in for the rest of the crew to get downgraded and the after effect took years to play out (with CPN shareholders who bought in right before the filing feeling happy with the recent ~$3/share result).

Thus, it may be some time before the agencies react, holders are forced to sell and mark, and the rest of the world sees the result of over-priced and hype-driven strategies…or maybe somehow this time will be different. If so, I just hope somehow it isn’t for the worse.

Rollercoaster

It is hard to know sometimes what is the cause and what is the effect. This is similar to the problem of mistaking correlation with causation, especially when the causation seems plausible. Such is an issue that I have faced of late with respect to my overall mindset, my outlook on the markets, and my professional choices. On the one hand, some suggest that I would be more optimistic and less morose if I stopped anticipating the impending doom or if I would choose to stop learning about bankruptcy and distressed debt. But I also wonder whether the latter are emergent properties of the former, or maybe whether all are independent, though correlated and similar in content. Such ponderings may be fruitless but after a week of a rollercoaster ride in the markets and my psyche, determining the root seems like a worthy venture.