Monday, April 14, 2008

Wachovia vs. Retail Sales: FIGHT!

I haven't read enough on Wachovia to make a lucid commentary. I'll only say that I'm suspicious when a bank shows a relatively small loss, but decides to raise a very large amount of cash.

Anyway, Wachovia bonds opened up mildly wider, say 3bps, but wound up about 6bps tighter on the day. Now about 20bps tighter than 3/31.

Bank/broker stocks got hammered today on the theory that Wachovia's writedown portends ugly things for upcoming earnings. There might have been an element of concern that more banks would be issuing new common shares as well. I am 100% with this line of thinking. Banks and brokers are going to take a long time to rejigger the business model. Its possible that this quarter is the last of the big writedowns, but that we see mediocre earnings growth from here. Therefore in order to buy bank/brokerage stocks, the valuation really has to be right.

In the credit complex, the big names were mostly unchanged to slightly tighter. Lehman unchanged, Citi unchanged, Merrill unchanged. Actually Lehman and Merrill's subnotes were quoted 5bps tighter on the day. Just glancing at CDS runs, it looks like more names are wider than not, although all moves are pretty small.

MBS were wider by about 6bps as swaps were 5bps wider. That's an unusually large move for swaps by recent standards. I haven't found anyone who seems to have a compelling theory as to why. Smells like people altering their hedges for whatever reason.

Treasuries were weak too, and steepened by 3bps. I still like steepener trades. The Fed isn't going to be hiking for several months, and that should anchor the short end. But as the economy starts to bottom out, inflation will become the bigger concern, pushing longer rates higher. That ain't happening tomorrow, but it will happen.


Darth Toll said...

So you DON'T see a waterfall (30-40%)collapse in the bond market, similar to 1931 that kicked off the actual depression? A lot of notable market observers are calling for a dramatic increase in long rates as the foreign central banks cry "NO MAS!". It will be the sudden recognition of the wholesale putrefaction of the Fed's balance sheet with dodgy assets and perpetual weak-dollar policies.

This is a serious question. It seems as if the treasury market is now distorted beyond recognition as to the risks of long-term inflation and the crack-up-boom, and rates should be much, much higher than they are. If the petro-recycling were to stop for some reason, I could make a pretty good case for a dollar collapse where the currency would have to be defended by higher rates.

That "some reason" could be anything from full-blown food riots and political crises arising from crack-up-boom/melt-up dynamics to a simple lack of interest in supporting fictitious capital due to escalating sovereign wealth fund losses. Maybe the petro-recycling regime breaks apart with $150/bl oil. Who knows?

All that is known is that the massive inflows of FCB capital and associated foreign currency pegging is inherently unstable and there will be a tipping point where the wheels fall off. This could be in a matter of weeks if oil keeps this up. BTW, the Asians are largely out of this game at this point and its only the petro-recycling that keeps rates artificially low and the CUB raging on.

Love to hear your take on this!

Anonymous said...

J.P. Morgan Chase & Co.'s net profit fell 50% to $2.37 billion, or 68 cents per share. Net revenue was down 11% at $16.89 billion.

The company said it added $2.5 billion to its allowance for credit losses, and that its investment-banking unit took markdowns of $2.6 billion, including markdowns on leveraged lending and prime and subprime mortgages.

Chairman and CEO Jamie Dimon said, "Our earnings this quarter were down significantly as market conditions and the credit environment remained challenging." Looking ahead, he said: "These factors have affected, and are likely to continue to negatively impact, our firm's credit losses, overall business volumes and earnings -- possibly through the remainder of the year, or longer."

Emphasis or longer.

He's flirting with honesty. Very, very late in the game, but before the end, yes. I'm sure he's closed an his apartment in the Plaza next to Cayne, or he wouldn't be so glib.

Accrued Interest said...

On the dollar... there is nothing fundamental that's likely to occur that would strengthen the dollar. I'm not a currency expert so I couldn't tell you whether its technically oversold or something like that which could of course cause a near-term rebound. But ultimately the dollar isn't coming back until rates start rising in the U.S. or falling in Europe.

On foreign buying of U.S. bonds... what I'm hearing is that Asia hasn't been buying Treasuries, and have backed off buying other product as well (although not entirely). Actually I'm hearing most of the demand for Treasuries is local.

I've thought a lot about the theory that a dollar decline leads to foreign selling of US bonds, then leading to higher rates. Wouldn't that be a self-correcting problem? Higher rates lead to a stronger currency?

Anyway, I think the dollar problem will wind up solving itself in the next 9 months. I suspect the Fed is only 25bps from being done. In that case, the dollar will start to rally.

shankar said...


Any comment on this?

That problem in Europe could certainly hit our shores pretty soon, no?


Anonymous said...

regarding high US rates lead to stronger USD, i think recent history seems to suggest that it does not necessary hold. There could be other factors at play.

The 2 periods were:
1985-1986: USD dropped on a trade weighted basis over 25% I think. Yet the US 10Y yields tightened to 7% to 12%.

Jan 2002 to Sep 03:USD dropped about 20% I reckon, but US 10y yields (peak to trough) tightened about 200bps.

I guess there are economic cycles at play and possibly overseas demand which drove yields & USD in both directions.


DAB said...

I have a real world question to interject. What is the market looking like for BB rated corperate debt?

Say the company is in fine shape, maybe 25% debt to cap and wants to issue a managable amount of debt (well less than 10% of cap, say), basically looking for normal course of business funding capital projects.

Accrued Interest said...

DAB: Almost impossible to tell. There are some industrial BB-rated credits where the secondary spread is lower than Bank of America. Then there are plenty where I doubt they could sell bonds right now at any reasonable price.

Fred: I'd say the relationship between short-term real rates and the dollar is strong, generally speaking. If rates rise because inflation is rising that's different.

Accrued Interest said...

Shankar: The problem started on our shores. Not sure what you're driving at. We're exporting the problem to them!