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The glimmer of hope we pointed to last week -- that the US housing market should bottom out in the middle of 2009 -- remains credible with the increase in sales of existing houses, suggesting that lower prices are slowly but steadily working towards bringing supply and demand into balance. However, the total turnaround in US spending and savings habits that Merrill Lynch see as required for renewed economic health looks very elusive. Likewise, a return to health of the entire US financial sector seems even further away than a recovery in housing, which is not actually surprising since the credit crisis is the result of the housing crisis and cannot be resolved ahead of it. |
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The Federal Deposit Insurance Corporation (FDIC) has announced that its list of problem banks has grown over the last quarter from 90 to 117 (but never says which banks, presumably as that would be the kiss of death). It does however list the names of failed banks – and that list is growing by one a month. Reserves at FDIC, which cover deposits up to USD 100,000, have fallen from the required USD 52 billion (1.15% of insured deposits) to USD 45 billion, obliging the insurer to levy new funds. Some analysts estimate the capital needs of FDIC at much higher levels, as bank failures accelerate; loans qualified by the FDIC as “troubled” (overdue by 90 + days) grew by 20% to USD 162 billion in Q2. |
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Bennet Sedacca of Atlantic Advisors provides complementary information to the FDIC with his original (and witty if it were not so sad) analysis if the “Walking Dead” (thank you, John Mauldin). He analyses the way major corporations heading for trouble first deny and act to reinforce their denial by announcing share buy-backs, or the like, then announce the losses everyone was suspecting, only to seek extra capital at ever higher costs, before finally being unable to raise funds at any cost. He names eight banks and two auto makers as meeting his criteria, and adds a further five banks and two insurers as “limping”. Some of them are very big names. We also observe that Citigroup opined what we wrote last week – namely that Fannie and Freddie should survive till the end of the year – and their shares enjoyed a small recovery. Holders of preference shares, along with ordinary shareholders, are at extreme risk from nationalisation or other form of government rescue. Whilst some compensation for debt holders may be provided, it is unlikely to be enough to please the sovereign funds which have bought huge quantities of GSE bonds. |
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As we have had the “denial” from senior Government and Fed figures, and Bernanke has now started using expressions like “one of the most difficult contexts ever observed”, and Nobel-prize economist Myron Scholes foresees a global and long-lasting recession, it seems that the end of the denial phase at the level of the overall economy may be approaching. Can the Sedacca cycle apply to the Administration and the US economy as a whole? |
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We have already drawn attention to the problems in the UK as a result of following the US path of growth through debt. Some commentators are noticing that Sterling, unhindered by being attached to the EUR and having long lost its reserve status, is allowing market forces to act to return the UK economy to better balance. What of the euro zone? The housing and credit crises are very much present there too, and the zone is also heading for recession. This may explain the weakness of the EUR vs the USD, although it is hard to identify a financial sector crisis in Europe as severe as the USA’s. |
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With the exception of the strengthening of the USD (which we confess took us by surprise), our fears both of a continued weakening and spreading of economic weakness, and also of failure of the financial system are materialising. We still see the US authorities as bringing a “sticking plaster” solution where major surgery is required, but they will probably succeed until the presidential election is over. |
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Our advice to fixed income investors remains the same: quality first, extending that notion to solid industrial corporation debt (call us for suggestions); for additional return continue to seek selected sovereign debt in domestic currencies, and be bold enough to lengthen average maturities. |
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Focus |
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(+) US housing: sales of existing homes went up by 3.1% over June, although inventories also rose to reach a record level |
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(!) US banks: JP Morgan expecting USD 600 million loss from their position in GSEs; spreads on bank debt are at their highest since the 1990s; the (secret) list of banks in trouble lengthened. The FDIC has rescued a bank in Kansas, the 9th rescue this year |
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(–) France: Sales of new housing down by 30% in the first half of 2009 clearly indicating a housing crisis, although the relatively low level of household indebtedness should mean a crash is avoided |
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(–) UK: GDP growth fell to 0.2% in Q2, the lowest in 16 years, with recession likely. Sterling below USD 1.85 for the first time in two years |
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(–) Euro: USD/EUR fell below 1.46 for the first time in six months |
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(–) Denmark: for the first time the Central Bank had to take over and rescue a regional bank (Roskilde) when no domestic acquirer appeared |
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(+) positive for bonds (–) negative for bonds (!) watch out (?) begs the question |
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