Jobs, Downgrades, Foreclosures Oh My...
A: Umm, who was it that keeps saying this stuff doesn't matter; the fed will bail us all out, don't fight the fed! Yea, right! In yesterday's bizarro trading day, S&P cut the ratings' of bond insurers MBIA & Ambac and Fitch downgraded MGIC Investment and PMI ratings, and stocks ignored it and flew on stronger than expected retail sales data. It's amazing how bond insurer downgrades went from and 'end of the world' play, to a huge rally play over the course of 5 months! Perhaps this was all part of the grand plan, to postpone the effects of downgrades to a later time when markets could more easily absorb the impact? Just do not discount the after-effects these downgrades will result in for the banks and brokerages with assets insured by these guys! In short, expect the write-downs to keep coming.
Lets discuss one by one.
JOBS: Unemployment Rate Jumps to 5.5%; NFP -49,000
A shock to markets, yes, a shock to those following macro trends, no! That's all I really have to say about that, Bubba. The labor market is very weak, and the unemployment rate never should have ticked down to 5% last month anyway (read, "Analyzing The REAL Jobs Report")! Nevertheless, the 0.5% jump will cause a headline shock to markets and the media will be all over this with recession articles this weekend!
The talk with this report is that perhaps the adjustment due to the surge in 'youngens' entering the work force. As we talk often about understating data, perhaps this report is overstating the unemployment rate? The fed recently updated its guidance for 2008 unemployment to be 5.6%; so the fact that we could be at 5.5% right now, makes the feds expectation seem very conservative!
Barry Ritholtz does his usual jobs reporting (chart via BLS):
FORECLOSURES: Top One Million
According to CNN's, "Homes In Foreclosure Tops 1 Million":
More than one million homes are now in foreclosure, the highest rate ever recorded, according to a trade group which warned Thursday that number will continue to climb.This too really isn't that surprising as we all know that housing across the nation is struggling. What it tells me is that we are past the expectation of this grim reality, and entering the period where we will have to deal with it! It means a lot of bank owned homes will be sold at big discounts, which will ultimately have an effect on the homes nearby and on psychology of buyer interest in general. The result will likely be a continued period of negative pricing data on the Case/Shiller index. As I said before, talk of a housing bottom and a sustainable recovery is quite silly at this point.
The Mortgage Bankers Association's first quarter report showed that a record 2.5% of all loans being serviced by its members are now in foreclosure, which works out to about 1.1 million homes. That's up from the 2% of loans, or about 938,000 homes, that were in foreclosure at the end of 2007.
The report also showed that 448,000 homes, or about 1% of loans being serviced, began the foreclosure process during the first quarter. That's up from about 382,000 homes, or 0.83%, that entered foreclosure in the last three months of 2007.
BOND INSURERS: Downgrade Assures More Write-Downs To Come
Ahh, the bond insurers; the topic of so many posts from November - February.
In simple terms, lets explain why the threat of downgrades for the bond insurers were newsworthy. The problems of the credit crisis were initially caused by the bursting of the housing bubble (lets forget what led to this bubble for now). Housing is a highly leveraged asset, and wall street innovated products that could generate tons of revenue securitizing loans for home purchases, allowing the banks who make the loans to offload the asset and write more loans. The volume and fee based innovation encouraged reckless lending, as the option for securitizing the loan into a mortgage bond and reselling it on the secondary mortgage market existed. Well, that all came to an end real fast. These products were insured to protect against default; hence the industry of the bond insurers! If the bond insurers get downgraded, the products they insure get downgraded too! So, not only do Ambac & MBIA lose the ability to write new muni business, it will cause a new round of write-downs for the corporations that bought their insurance policies of the riskier bond products held on their balance sheets; a secondary effect on the whole financial services sector.
Back on February 26th, the AAA ratings of Ambac & MBIA were maintained, and I wrote:
"Getting ratings affirmations for both these guys does two very important things: adds clarity/confidence to tradabale markets + saves a round of write-downs for financials that would have come if the downgrades hit. I caution you to interpret this as a solve all fix, as it is very possible we will revisit bond insurance ratings issues if credit markets and housing markets continue to be pressured causing more defaults; especially to higher quality debt classes."
So it goes like this:
BOND INSURER DOWNGRADES ---> DOWNGRADES OF SECURITIES THEY BACKED BY BOND INSURER POLICIES ---> FIRMS HOLDING DOWNGRADED ASSETS FACE MORE WRITE-DOWNS
Thats the simple explanation; of course its way more complicated than this. So what can we expect for further write-downs on a sector battered by hundreds of billions in write-downs already and multiple rounds of capital raising and shareholder dilution? Yves Smith over at Naked Capitalism has a discussion today:
"I received a note today putting exposure within the banks at $600 billion. Barclay’s is estimating losses of $143 billion on a markdown - I think Moody’s has to follow suit for it to kick in at that level - UBS puts it at $203 billion, and Oppenheimer says Citi, Merrill, and UBS will write down somewhere between $40 and 70 billion among the three of them - a wide spread, I agree."Reality is starting to hit. Is your head in the sand?