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Today's
Market WrapUp 03.04.2008 Mon
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Barbera Archive
US Exporting
Deflation
BY FRANK
BARBERA, CMT
Another
week of trading and another week of ‘quiet melt-down’ style
financial news. In what can only be described as an endless stream of
negative news, reports out over the last few days have actually
highlighted still more problems at the monoline insurers. Even if you
assume that sub-prime losses are more or less discounted in the market
(a big assumption), further analysis is now pointing to the idea that
still more problems will be seen with second lien home equity loans.
It seems that the monoline insurers in their unchecked hubris managed
to expose themselves to even larger quantities of home equity loan
securities, now estimated to be in the neighborhood of $500 Billion
dollars. That’s roughly three times the monoline's ability to pay
should claims ‘flood in,’ and ‘flood in’ is precisely what is
starting to take place. According to recent data from GMAC/REFCO,
loan-to-values rose from 80% to 89% for home equity loans, and on
reduced documentation loans, the loan-to-value has skyrocketed from 3%
to 60%. Assuming that broad residential real estate prices continue to
decline in 2008 by another 10%, we have a recipe for still more huge
write-downs at the banks and possible insolvency at some of the shaky
firms.
Of
course, the week has already claimed more victims, with Monday’s
trading spotlighting the collapse of Thornburg Mortgage (TMA) as the
company revealed that it would likely be unable to meet a further $270
million in margin calls on crucial repurchase agreements. For
Thornburg, the root of the troubles this month has been a 10% to 15%
drop in the value of “ALT-A” mortgages with an estimated $950
Billion in value defining the ‘Alt-A’ space. The result in this
latest plunge was only more forced selling in already illiquid
derivative securities, new lows in the Markit.com indices, and further
new lows for Wall Street Creative Finance – as the domino style
daisy chain continues its plunge into the abyss.
Above: Thornburg Mortgage (TMA)
At
the moment, so many highly leveraged derivative players are running
into margin calls and forced liquidations with a wide range of
mortgage related CDO’s, and a host of other derivatives is sending
further shock waves through the market. Last week, Peloton Partners,
an award winning hedge fund, ran into liquidity problems and was
actually forced to fold within days. At this stage of the game, the
credit markets have turned predatory and are no longer being deluded
by false appearances. This means that the AAA credit rating for the
monolines is taking on an empty stature as no one really believes it
any more, and ditto that of the sagging balance sheets for the GSE’s,
where both Freddie and Fannie remain under constant selling pressure.
A prelude to a great crash? Maybe.
Another
item to add in under the header of still more bad news, is the fact
that Warren Buffett suggested on Monday that his offer for the
monolines is effectively ‘off the table’ and things promise to
remain interesting for some time to come, noting that to date, no
substantial initiatives have been forthcoming. Charlie Gasparino or no
Charlie Gasparino, the Gasparino AMBAC squeeze was into the close of
Feb 22nd, a Friday with hints and promises of a monoline deal pending
early the following week, so as they used to say on a TV commercial,
“where’s the beef?." Perhaps the lack of any substantive
‘deal’ on the monolines is at the root of the most recent sell off
in the Nuveen Municipal Bond Index where yields would almost certainly
have to be re-priced to adjust for the lack of insurance coverage.
This is clearly not good news for countless State and City programs
where a re-pricing of bond yields is precisely what deteriorating
budgets don’t need. Take the countless iterations of California Muni
Bonds listed at the end of this update, many of which have been
falling precipitously in recent days as the State of California, which
would be the worlds 6th largest economy all by itself, confronts a
sprawling budget deficit.
Of
course, while the US may have led the charge with respect to inventing
creative finance, the US is hardly alone in dealing with its ill effects.
In Spain, the housing bust has taken on epic proportions. In 2007,
Spain built nearly 750,000 homes, more then all Germany and France
combined with total demand only 60% of that construction figure. The
result, a huge glut where it is estimated that prices will fall by
more than 20% between now and 2009, with 2007 producing the first
negative year for housing in Spain since 1991. According to the
International Herald Tribune, “the amount of Spanish households
wealth tied up in property in recent years has approximated E521
Billion or 509% of GDP. For US households, which held 17.20 Trillion
in Real Estate, the equivalent figure is 159% of GDP. In Spain,
roughly 96% of all loans were variable in nature, raising the specter
of rising tide of delinquencies and foreclosures, all of which has
been making headlines in recent weeks. Combined with steady weakness
in the economies of Italy, Greece and France, the entire slow down
facing Europe is starting to make a persuasive case for rate cuts,
even for the stubborn hawks at the ECB.
While
it is very unlikely that the ECB will cut interest rates this week, on
March 6th when they meet, it is more likely that a statement from the
ECB will accompany the release. Potentially, the statement seen on
Thursday morning could be a major event, as the effective tone of the
wording may begin to realign the shift between ‘mounting inflation
pressures” and downside risks to economic growth. You see, while
Germany’s economy has been somewhat insulated from the violence of
the recent global economic downturn, other EMU countries are feeling
it quite strongly, putting huge pressure on the German influenced ECB
to get with the stimulus program for the EMU as a whole. To this end,
a more important trend reversal may not be far away for the super
currency, the Euro, which like Atlas has been stronger than steel.
Yet, viewed on a long term Elliott basis, the Euro appears to be
getting close to the end of large Primary Wave [3] advance which could
peak in the low to mid 1.50 zone.
Above:
Perhaps the preferred count for the Euro, while Below: an
alternate count which would allow for perhaps one additional higher
high. Either way, the Euro seems to be approaching a more serious Wave
[3] peak.
In
addition, sentiment toward the Euro is now nearly universally bullish
on the verge of making new all time highs on the 10 week moving
average. Again, this does not guarantee an imminent downside reversal,
but it does suggest that a larger sell off could be in the offing
should the ECB come to the market with a more dovish statement;
sometimes the changing of a one or two words can be all that is needed
to trigger a serious change in trend.
Flashing
back to a meeting at the Royal Bank of Canada in October of last year,
is precisely that, a change in wording, that halted the seemingly
unstoppable advance in the Canadian Dollar at 1.12, and sent the
Loonie plunging back toward .98 over a period of two weeks. That
decline was later confirmed by a rate cut AFTER the fact, while the
market movement was caused by a change in wording. Thus, this week
could be important for the Euro where everyone seems to be on one side
of the proverbial boat.
In
addition, we might also take a moment and look at the Corporate side
of the EMU where of late, the bearish headline announcements have been
quite widespread. In this event, we are not just talking small potatoes;
no, this time, we are seeing serious headlines from companies like
Airbus and BMW grumbling about the high threshold of pain being
imposed by 1.50 on the Euro, a figure most see as a breaking point for
sustaining profitable operations. Last week, this headline echoed
across European Business news as BMW announced job cuts.
BMW
Plans 5,600 More Job Cuts (8% of Workforce)
Feb 28, 2008
“MUNICH,
Germany — Luxury automaker BMW AG said Wednesday it will cut another
5,600 jobs by the end of 2008, on top of 2,500 other positions that
have already been eliminated, as it moves to pare expenses amid a
wider cost-cutting program.Speaking to reporters, BMW's head of
personnel, Ernst Baumann, said that the jobs being cut include 2,500
full-time and 2,500 temporary workers in Germany, along with 600 other
positions abroad, primarily international sales and distribution
positions. He said that another 2,500 positions _ all of them
temporary _ had already been eliminated, bringing the total number of
cuts and planned cuts to 8,100 positions, or 7.5 percent of the
company's total work force of almost 108,000, including both permanent
and temporary employees. The cuts to its permanent work force, which
totals 80,000 worldwide, account for 3 percent of its staffers. The
Munich-based company did not say specifically where the 600 global job
cuts would come. Within Germany, the cuts would be spread across its
facilities with the exception of a plant in Leipzig.BMW currently
employs 4,700 people at its plant in Spartanburg, S.C., where it
produces the X5 SUV and the Z4 Roadster.”
Courtesy
Associated Press
In
the last year, prices for hot-rolled steel are up better then 20%,
causing BMW to report sagging net income, along with slower sales to
North America courtesy the strong Euro. Of course, a quick glimpse at
the chart of several high profile European Auto exporters speaks
volumes as to where sales may be headed, with Mercedes down 40%, BMW
down 30%, and Porsche stock down more then 40% in recent months.
Above: BMW
Corp down over 30% from the highs.
Above: Daimler Benz (Mercedes) down almost 40% in just a few
months.
Above: Porsche – down over 40% from the highs as a strong
Euro cuts into export sales.
Among
other leading European business, Airlines like Lufthansa and Air
France have been attempting to radically cut fares in order to keep
load factors at relatively full capacity. However, cast against the
backdrop of soaring jet fuel, this too has been a losing battle with
stock prices falling, and both tourism and business travel tapering
off. In Italy, Alitalia lurches closer to liquidation.
Above:
Lufthansa coming back down toward earth with a 35% decline from the
highs.
Above: Air
France down nearly 60% from the highs.
Finally,
Airbus is also deeply concerned about the strong Euro, suggesting the
possibility of job cuts and having to realign its workforce to non-EMU
locals. A very large political hot button in France, this issue will
also be weighting heavily on the minds of the ECB when they meet later
this week. Airbus is facing massive losses with the stock price
already down nearly 50%.
Above: European Aero-Sico EAD Corp parent of Airbus, cut in
half.
From
the New York Times 12/09/07
EADS
Posts $1 Billion Loss and Talks of More Job Cuts
PARIS,
Nov. 8 — The chief executive of EADS,
the parent company of Airbus,
warned Thursday that widening losses and the rapidly eroding value of
the American dollar could force it to cut an additional one billion
euros in operating costs — a move that could result in further job
losses. In the nine months since Airbus embarked on a wide-ranging
corporate overhaul to reduce costs, the euro has appreciated to more
than $1.46 from about $1.35, rendering those efforts inadequate if the
company is to remain competitive with its chief rival, Boeing.
For Airbus, which sells its aircraft in dollars but incurs about half
its costs in euros, every gain by the euro of 10 cents against the
dollar represents a billion euros (about $1.47 billion) in lost
profit. Comparing the dollar’s steady slide against the euro to a
“sword of Damocles” hanging over the business, the EADS executive,
Louis Gallois, said managers at the company, formally European
Aeronautic Defense and Space, were determined to take new steps to
protect Airbus from “unbearable” exchange-rate fluctuations.
As
can be seen in the charts of any number of other leading EMU
Corporations, while the full fledged ripple affect of downsizing and
job losses may not be headline news quite yet, the portrait of sagging
values suggests that European equities are discounting tough times
ahead.
Above: Michelin of France, down nearly 46% from the highs. Over
the last year, Michelin has been directing most its new investment away from Europe and toward
the US with new plant in Greenville, South Carolina – jobs not being
created in the EuroZone.
Above: French Consumer Goods export giant, L-Oreal down 30%
from the highs.
Above: Hugo Boss down 43% in just six months high to low; is
this a forecast of slowing sales ahead?
In
fact, one other key indicator is also signaling a rising level of fear,
and that is the Relative Strength Ratio of the Swiss Franc versus the
Euro. A good proxy for confidence and fear, the Swissy normally under
performs the Euro when confidence is high and fear low. During the
last global bear market, when confidence tumbled and anxiety about the
trend for the economy took control, money fled the Euro for the
‘single mindedness’ of the staunchly independent Swiss Franc. The
trend then reversed in early 2003 as a new bull market in stocks took
control courtesy of the US Fed and emergency rates. Updating that
chart through the present time, we note that since last August and the
beginning of the global credit crisis, the Swissy has been on the move
and has been steadily gaining traction against the Euro, where if
political pressures are not wisely and rapidly handled, the risk to
blowing apart the EMU will be substantial; and with that a new era of
regional protectionism, the ugly words of an unfolding downwave
continue as the Swissy breaks out.
Finally,
in follow up to our Feb. 19th report, we note
that the Japanese Yen has once again broke out sharply to the upside,
with the US stock market once again unwinding to the downside. We note
this because commodity markets remain absolutely HISTORICALLY
overbought. Between the credit derivatives market forced liquidations,
and carry trade unwinding of equity market positions, we wonder how
long it will be before an innocent round of profit taking sweeps
through and begins a delevering move in sky high commodities.
Impossible? We think not.
At
the close, the DJIA ended down 45 points, closing at 12214, and the
S&P 500 lost 4.59 points with a close at almost 1327. The NASDAQ was
slightly higher today, up 1.68 to close at 2260.28. The 10 year bond
yield ended at 3.62%, while gold finished lower, down 20.04 at 963.66.
That's all for now,
Frank Barbera
Have
a look at these symbols, proof positive the credit crunch continues to
spread…
California
Municipal Bond CEFs
BlackRock CA Insured Municipal Income Trust III (BCK)
BlackRock CA Municipal 2018 Income Trust (BJZ)
BlackRock CA Municipal Income Tr II (BCL)
BlackRock California Insured Municipal 2008 Term Trust (BFC)
BlackRock California Investment Quality Municipal Trust (RAA)
BlackRock California Municipal Bond Trust (BZA)
BlackRock California Municipal Income Trust (BFZ)
BlackRock Insured Municipal Term Trust (BMT)
BlackRock MuniHoldings California Insured Fund, Inc. (MUC)
BlackRock MuniYield California Fund, Inc. (MYC)
BlackRock MuniYield California Insured Fund, Inc. (MCA)
Eaton Vance California Municipal Income Trust (CEV)
Eaton Vance Insured CA Municipal Bond II (EIA)
Eaton Vance Insured California Municipal Bond (EVM)
MFS California Insured Municipal (CCA)
Morgan Stanley California Insured Municipal Income Trust (IIC)
Morgan Stanley California Quality Municipal Securities (IQC)
Morgan Stanley Insured California Municipal Securities (ICS)
Neuberger Berman California Intermediate Municipal Fund (NBW)
Nuveen California Dividend Advantage Municipal Fund (NAC)
Nuveen California Dividend Advantage Municipal Fund 2 (NVX)
Nuveen California Dividend Advantage Municipal Fund 3 (NZH)
Nuveen California Investment Quality Municipal Fund (NQC)
Nuveen California Municipal Market Opportunity Fund (NCO)
Nuveen California Municipal Value Fund (NCA)
Nuveen California Performance Plus Municipal Fund (NCP)
Nuveen California Premium Income Municipal Fund (NCU)
Nuveen California Quality Income Municipal Fund (NUC)
Nuveen California Select Quality Municipal Fund (NVC)
Nuveen California Select Tax-Free Income Portfolio (NXC)
Nuveen Insured California Dividend Advantage Municipal Fund (NKL)
Nuveen Insured California Premium Income Municipal Fund (NPC)
Nuveen Insured California Premium Income Municipal Fund 2 (NCL)
Nuveen Insured California Tax-Free Advantage Municipal Fund (NKX)
Nuveen North Carolina Dividend Advantage Municipal Fund (NRB)
Nuveen North Carolina Dividend Advantage Municipal Fund 2 (NNO)
Nuveen North Carolina Dividend Advantage Municipal Fund 3 (NII)
Nuveen North Carolina Premium Income Municipal Fund (NNC)
PIMCO California Municipal Income Fund III (PZC)
Van Kampen California Value Municipal Income Trust (VCV)
Copyright © 2008 All rights reserved.
CONTACT
INFORMATION
Frank Barbera
The Gold Stock Technician
PO Box 48072
Los Angeles, CA 90048
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