Wednesday, September 30, 2009

Refining margins are really low

From Platts (2009 September 29) , quoting Verleger:

"Verleger points to a weakening 3:2:1 crack spread on the NYMEX, which settled at $2.28/b on September 25, the 69th smallest of 1,239 observations dating back to January 1986. "[I]t is in the fifth percentile...This is bad, very bad," he said.

Verleger cites not only poor product demand but mounting global inventories of distillate and gasoline."

If the refiners cannot make any money refining, who will buy all the oil?

You can play with the data shown above at Bloomberg

Tuesday, September 29, 2009

Subprime Housing Mess 2.5

Why is this version 2.5? Because we should have learned.  This one is brought to you with the usual actors only this time they are sitting in slightly different chairs.

The Buyer is the same as before, but instead of exceedlingly loose credit standards, the consumer is helped along by an $8,000 first time home buyer tax credit.

The Provider of the loans is not Wall Street this time, but good old Uncle Sam.  From WSJ Opinion (2009 September 29)

The reason for this financial deterioration is that FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, FHA's insurance portfolio will have expanded to $1 trillion from $410 billion. Today nearly one in four new mortgages carries an FHA guarantee, up from one in 50 in 2006. Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guarantee repayment on more than 80% of all U.S. mortgages. Sources familiar with a new draft HUD report on FHA's worsening balance sheet tell us that the default rates have risen most rapidly on the most recent loans, i.e., those initiated or refinanced in 2008 and 2009.

All of this means the FHA is making a trillion-dollar housing gamble with taxpayer money as the table stakes. If housing values recover (fingers crossed), default rates will fall and the agency could even make money on its aggressive underwriting. But if housing prices continue their slide in states like Arizona, California, Florida and Nevada—where many FHA borrowers already have negative equity in their homes—taxpayers could face losses of $100 billion or more

So who is buying the mortgages? The very banks in trouble, with a little 'encouragement' from the FDIC. (WSJ, September 10,2009)

Holding Ginnie bonds help banks look better because federal bank-capital  guidelines give the Ginnie securities a "risk weighting" of 0%. That means banks don't have to hold any cash in reserve to protect against losses. By contrast, securities backed by Fannie Mae and Freddie Mac, the two mortgage giants seized by the government, carry a 20% risk weighting, meaning some cash needs to be set aside to hold them, even though most banks and investors think there is scant risk of Fannie or Freddie securities defaulting. Privately issued mortgage-backed securities can receive risk weightings of 50%, while many other types of debt carry 100%.
Because of the different risk weightings, bankers say they are selling relatively safe assets like Fannie securities and replacing them with Ginnie securities. The move doesn't shrink banks' balance sheets or remove their troubled assets. But it reduces their total assets on a risk-weighted basis. That is important because risk-weighted assets are the denominator in some key ratios of bank capital.
"With the pressure for capital, that's really made the Ginnie Maes more attractive," said John C. Clark, chief executive of First State Bank in Union City, Tenn. The bank's holdings of Ginnie securities jumped to $66 million at June 30 from less than $4 million a year earlier.
Like some peers, First State bankrolled those purchases partly with taxpayer dollars that were intended to stabilize the banking industry and jump-start lending. The 32-branch bank used a "significant portion" of the $20 million it received through TARP to buy Ginnie securities, Mr. Clark said. Mr. Clark credits the strategy with helping First State preserve its capital ratios even as loan defaults swelled to $9.5 million on June 30 from $1.6 million a year earlier. During the same period, its total risk-based capital ratio climbed to 11.3% from 10.7%. That gave First State some breathing room above the 10% ratio regulators require for banks to be deemed "well capitalized."
So my friend, whom I'll call Mr. Green and is a banker:  I have my eyes on some nice short term GNMA mbs paper.  (Fortunately your last name makes Mr. Green easier, otherwise I'd use a different color)  Let us load you up on the GNMA's and forget commercial lending.  Good rates, no 'risk' and you can be out to the links even earlier!  As a nice bonus your risk based capital ratios will improve as well.  I can even provide some additonal low cost margin leverage on my end as well.  The banking regulators and your boss will love you!  </end sarcasm>

Unfortunately this party will end like the last one, but we all will be paying the bill again and it will be much larger.  Too late, the bills are already coming due:  Calculated Risk (September 18,2009) -- FHA Cash Reserves will drop below requirement

Ironically, the Federal Reserves focus on purchasing mortgage backed securities from GNMA, Fannie Mae, and Freddie Mac compresses the spread between mortgages and treasury rates.   An artifcially compressed spread crowds out any private market competition, forcing more loans into the gentle loving arms of Uncle Sam.

If I sound a bit annoyed in this post, you are correct.  Collectively we are not learning from our very recent mistakes.

Monday, September 28, 2009

Long Term Interest Rates at juncture

Long term interest rates in the form of the etf TLT (20+ year U.S. Treasury bonds) is at an interesting jucture.

As you can see from these charts by it is approaching a long term overhead resistance as shown by the white line. Each time TLT has reached this area it has eventually gone lower. Will it do so again?

Friday, September 25, 2009

Finding and managing your credit score

In the 'before time' if you had a pulse you could get credit. Those easy times are long gone and bankers seem to have dusted off their old credit analysis textbooks and are taking risk analysis a little more seriously. One's credit score (FICO) has always seemed to be shrouded in mystery and until recently it was somewhat difficult to find out your credit score.

For a good primer on your credit score I suggest you read this article by the Wall Street Journal (September 9, 2009)

Recently several paid services have popped up which will provide your credit score as well as report on any discrepancies in your credit. Why pay for it when you can get it all for free?

A few years ago congress mandated all three credit reporting agencies provide you one free credit report a year. You can get this free annual credit report at All three credit reporting agencies make you go through several hoops in order to get the free report, and don't be suckered into paying for your credit score or a credit analysis. (Transunion requires you set up an account with them. It's free but annoying.) Eventually you'll get a copy of your credit report. I run mine every couple of years just to make sure everything is correct and have discovered discrepancies once or twice that I was able to resolve without too much pain or suffering.

Finding your credit score is a bit easier. Go to and sign up. Creditkarma intends to make money pitching you various credit card and loan offers based upon your credit information. Creditkarma provides a very readable estimate of your credit score and breaks down how your credit behaviour affects your score. The credit score provided by Creditkarma is from just one of the 3 credit reporting agencies so it is not perfect, but it will be close.
In a later blog entry I'll go through each credit factor and how you can over time improve your score.

Wednesday, September 23, 2009

So far, no hurricanes this year

Sometimes it is what doesn't happen that can make news. While todays action in the oil market is due to rising fuel inventories [zerohedge] I'd like to point out what those on the Gulf of Mexico already know: so far there has not been a major hurricane strike the continental US.

As I have mentioned previously (Aug 13, 2009) a significant percentage of the pumping and refining capacity for America is in the Gulf of Mexico. Not having a hurricane stomping around will keep the oil and natural gas flowing.

Let's see if we can make it through the entire hurricane season without any damage. Look for solid bids on reinsurance stocks and debt if this happens.

Thursday, September 10, 2009

Verleger on oil

Philip Verleger has some interesting things to say on why we had a spike in oil prices last year and when it could possibly happen again.

Philip Verleger, February 19,2009 at UCSD 59min 25sec

While it is an hour long presentation I strongly suggest watching it if you are interested in the energy markets.

The gist of his talk is how environmental regulation changes regarding low sulpher diesel excacerbated energy prices in 2008. The upcoming cleaner requirements for low sulpher shipping fuel may possibly create a simliar situation by 2020.

Wednesday, September 9, 2009

Consumer credit continuing to fall

Data published yesterday shows the continued retrenchment of the U.S. consumer.

I extended the graph's time period so you can see the last time consumer credit outstanding has consistantly been negative is before 1950.

Until the U.S. Consumer starts to borrow again any recovery will be very tepid.

Tuesday, September 8, 2009

Oil as a financial or physical asset?

The recent news of Deutche Bank shutting down their their Oil Fund elucidates the interplay between the financial and physical.

Here's an interesting article from Philip Verleger in late 2007 on the interplay of oil as both a physical asset used and consumed by the entire world as well as a financial asset. His prediction of $90 oil by 2010 was not extreme enough price or time wise!

Hugh Hendry and Eclectica fund August 2009 commentary

I ran across Hugh Hendry a several weeks ago and enjoy his irreverant style.

The Great Debate right now is inflation versus deflation and Mr. Hendry falls in the deflation camp.

Here's the August 2009 Eclectica commentary which he manages.

Hugh Hendry is also very bearish on China.

Mr. Hendry's positions are quite contrary. How many of his predictions come true will be interesting to observe.

Tuesday, September 1, 2009

Looking for that inventory bounce

I drive though the Port of Tacoma, which is a major import hub for several Asian car manufacturers, on my way to work every day.

From the freeway spur you can see acres and acres of cars, waiting for distribution to local and regional suppliers. During the panic you could see the inventory stacking up in all sorts of locations not usually used for storing cars. Parking lots for businesses, spare lots, etc. were full of row after row of brand new cars right off the boat.

Some of that excess inventory appears to have been worked off as the fields of cars are only located in their 'normal' staging areas.

Except this spot. This is a brand new warehouse just completed . Google maps' satellite photos don't even show the building yet. It does not contain a business but is completely full, and surrounded by new car inventory.

Driving around the building you can peer inside some of the garage doors and see the entire inside of the warehouse is full of cars as well. This is a 500,000 sq foot warehouse which is absolutely HUGE. Take the time to examine some of the photos below and look at the how many garage doors are along the long side of the building.

At least one real estate management firm is getting inventive on how to lease space.
(Photos were taken August 19th, 2009)

If you are looking for a brand new 500,00 sq foot warehouse right next to a rail hub in Tacoma, you might want to give them a ring.

Home foreclosures and delinquencies accelerating

In my previous postings I may have appeared a bit negative on future home prices and suspicious of the optimistic feelings exuded in the popular media regarding the housing market. Here's some reasons why.

Both graphs show functionally the same data but from different sources and slightly different methodologies. The coming flood of home foreclosures will further erode consumer wealth, bank balance sheets, home prices and consumer confidence. That's just some of the primary effects.

Graph #1 is from Paper Economy blog and shows loans on Fannie Mae's books that are seriously delinquent.

Graph #2 from Calculated Risk blog provides a slightly more granular look at similiar data from a different source, showing both mortgages delinquent and in foreclosure. I recommend you check both blog entries.

Look at the graphs and you will see the foreclosure crisis is getting worse, not better.