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GRANT'S INTEREST RATE OBSERVER -- Vol.26, No.23
Inflation-yes, we can
The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration (SBA).--Federal Reserve press release, November 24
Another day, another facility. At this writing, the federal government--into the maw of which, incidentally, the so-called independent central bank has seemingly disappeared--has pledged more than $8 trillion . . .
Somebody’s right
From Bloomberg News on November 25:
"The U.S. Treasury sold $26 billion of five-year notes at a yield of 2.11%, the lowest in five years. . .
From The Australian, Sydney, on November 22:
"Fears of the unknown long-term effects from the global financial crisis have sparked a new gold rush. . . .
Opportunists apply here
In the 30 days to November 20, the Dow Jones Convertible Arbitrage Hedge Fund Index executed a power dive remarkable even in this season of nose-down price action: It fell at the annual rate of 93.7%. De-leveraging and deflation explain the general tenor of things in convertible bonds. But another, more particular source of distress is at work in that specialized market. . . .
Yields from Hooverville
In September 2006, Martin Fridson, then the proprietor of FridsonVision LLC, looked at the ratings mix and predicted that a downturn as bad as that of 1990-91 could produce a speculative-grade default rate higher than the rate reached in the worst year of the Great Depression. At the time, the trailing 12-month default rate was 1.7%. Two years later, Fridson's dire scenario seems more plausible by the day. . . .
All chase Treasurys
Economics 101 teaches that falling prices attract buyers and rising prices repel them--except when they don't. One market that appears to understand demand and supply fundamentals is real estate. . . .
GRANT'S INTEREST RATE OBSERVER -- Vol.26, No.16
On the subtlety of the obvious
God invented the future to humble the economists, as the value wing of the investment community does not need to be reminded. Benjamin Graham, the Moses of value investing, taught that, because the future is unpredictable, investors require a margin of safety to protect themselves against adversity. There is no invincible suit of armor, but paying a good, cheap price is as sturdy as any. . . .
Don't wait up
This publication tossed a bouquet to [COMPANY], the nation's second-largest [. . .} last fall, and we reiterated our bullishness this spring (Grant's, November 30 and May 30). Here, we said, was a lightly leveraged, well-managed, still-profitable and high-yielding business that was holding its own in the slump. It would certainly prosper come the turn. We return now for another look. . .
Time's up, Mrs. Watanabe
Japan may rank a distant No. 2 in the world GDP standings, but it has no peer in yield hunger. Normal-size interest rates are what the home islands can't seem to produce. From Hokkaido in the north to Kyushu in the south, no bank known to Bloomberg pays its depositors as much as 1% a year--though by locking up one's funds in a 10-year CD, the trusting saver may earn as much as 0.9% a year. That's not quite half of the current 2% inflation rate.
To find the income they crave, Japan's savers therefore venture abroad. Hot on their trail, we have composed this essay on currency speculation. . . .
Merrill's mortgage blowout
"So, I think we will continue to sell assets, but in a way that makes sense from generating returns for our shareholders." So said John Thain, CEO of Merrill Lynch, on the second-quarter conference call. Eleven days later, on July 28, the Thundering Herd announced that it was selling "super-senior" securitized mortgage segments with a face value of $30.6 billion for just $6.7 billion, or 21.9 cents on the dollar. Merrill will finance 75% on terms it chose not to disclose. Only a month earlier, on June 27, Thain's own employees had assigned the identical mortgage contraptions an aggregate value of $11.1 billion on the second-quarter Merrill Lynch balance sheet.
Just what Merrill sold, it isn't saying, and neither is the buyer. . .
Wall Street's mortgages
Merrill's sale begs the question of just how much mortgage baggage Wall Street continues to lug around. The accompanying table reveals as much as the relevant public filings do--which, unfortunately, is not all it might be. . .
Howlers: a pair
The July 11 issue of this publication contained a pair of material errors. . .
Inflation's vacation
From their respective summertime peaks, crude oil has fallen by 19%, natural gas by 37%, soybeans by 24% and corn by 31%. The Goldman Sachs Commodity Index is off by 19%. Much more of this and declining food and energy prices should temper rises in the consumer price index, currently at a 17-year high. . . .
GRANT'S INTEREST RATE OBSERVER
VOL. 24, NO. 4
FEBRUARY 24, 2006
‘The Fed is through,’ revisited
Grant’s, in the prior issue, unequivocally stated that the funds rate would go no higher than 41/2%. It was not so much a forecast as a pronouncement. We might have said that the Fed “should be” through, or that it would be through if its new chairman were true to himself rather than to the expectations of his enemies, who mockingly call him “Helicopter Ben” just because of one slip of his professorial tongue in the deflation-dreading days of 2002.
Another dog’s tailIn corporate credit nowadays, the derivative might as well be the underlying. And the underlying might as well be the derivative. The defining fact of the corporate bond market in 2006 is that, by value, there are many more credit default swaps than bonds, i.e., more derivatives than things from which the derivatives are supposedly derived. In the four years ended in mid-2005, the CDS market grew by 19-fold, the bond market by only 38%. At last count, the CDS market totaled $12.4 trillion at face, or notional, amount, the corporate bond market a mere $5 trillion. Never mind your grandfather’s corporate bond market; the market of your father, uncle and older siblings is disappearing.
Deflation à la Eisenhower“Of course, the chief of the Federal Reserve asserted, the board must be alert to the dangers of deflation as well as inflation ‘and to counteract either with equal vigor.’”
Ben S. Bernanke could have spoken those words; William McChesney Martin actually did, in a speech to the Pennsylvania Bankers Association 50 years ago (as The Wall Street Journal reported at the time). Though the names of Fed chairmen may change, their phrases remain the same.
As the world tightens
Ian McCulley writes: When the European Central Bank finally raised its intervention rate last December after 30 months of inaction, some took it as validation that the European economy was finally on the mend. Others (probably partisans of the Bundesbank) noted that the rapid growth of the ECB’s balance sheet and European monetary aggregates almost compelled it to tighten at the risk of further inflating Continental (and worldwide) asset bubbles. And that 25 basis-point rise—all the way to 21/4%—may be just the beginning. On Monday, according to the Financial Times, the ECB president, Jean Claude Trichet, told European parliamentarians that expectations for additional rate increases are “perfectly sensible”—and, as of now, perfectly understood in the futures markets, which project a 3% rate by year-end. If so, short-term real rates would turn positive once more, the measured rate of inflation in the euro zone running at 2.2%.
