May 2013
1 post
JPM CIO swings, hits home run on UK RMBS
The embattled CIO unit at JP Morgan which was rocked hard last year by major losses from the “London Whale” saga hasn’t missed on all of their trades. A close look at their holdings in their $360bil plus available for sale (AFS) portfolio reveals pretty substantial bets on UK & Dutch RMBS.
As of year end 2012, JPM held over $70bil in non-US non-agency MBS bonds. This is a...
March 2013
1 post
Was a stealth tax in Cyprus the better idea?
The idea that the deposits of the average person in Cyprus (in addition to corporations, and Russian organized crime) could be confiscated via a levy has caused a great deal of fear in the financial markets. For instance, to people in the United States it almost seems unfathomable that you could wake up to have JP Morgan/Wells Fargo/Any Local Bank take 7-10% of your deposits.
Yesterday in the...
December 2012
2 posts
Pondering Fixed Income in 2013
I recently had a chance to speak with Loomis Sayles’ Matthew Eagan who is co-manager of the famous Loomis Sayles Bond Fund led by Dan Fuss. We covered a number of topics ranging from the Fed, Europe, High Yield, Hedging Tail Risk, and many others. You won’t want to miss it as he’s a very bright PM. It should be posted Wednesday or Thursday on the CFA’s Inside Investor...
Ex-Morningstar Analyst Confirms What We Already...
One of my favorite blog pieces that I have written was undoubtedly “Is DBLTX misunderstood? Is the fund victim of faulty analysis & biased research?” No, it wasn’t fun pointing out mistakes made by various individuals. Rather, the enjoyment was found in setting the record clear on an investment management start-up (DoubleLine) that was being unfairly scrutinized by faulty...
November 2012
1 post
The day after Halloween
Halloween was a fun time in our household this year, our four year old was finally old enough to have fun, dress up, and eat a lot of candy! As is probably typical in other offices throughout the country, many of my colleagues brought in leftover Halloween candy and the office collectively made ourselves sick on chocolate.
By the second day the large bowls had largely been picked through and...
October 2012
3 posts
"The incredible mispricing of risk"
Earlier this week I published a piece on the CFA Institute’s Inside Investing section titled: Mortgage REITs: Does Doubling the Leverage Make Them a Good Investment? The post was my response to UBS launching an ETN that provides 2x leverage on a basket of already heavily levered mortgage REITs “mREITs”.
In short, I believe it’s a dangerous product as many investors in...
Annaly's Michael Farrell Downplays the USA's...
If you’re a regular reader of financial journalism (including blogs such as this) you’ve frequently encountered the argument that the United States is in no way comparable to a country like Greece. This argument, which I generally agree with, states that US is a sovereign currency issuer while Greece does not have control over their currency as they are part of an union. Greece...
Will bonds be "burnt to a crisp"?
That was the question that Bill Gross asked in his latest monthly outlook. For now that’s likely much more of a fear tactic, but as investors we must always understand the risk/return characteristics of our investments.
In my latest for the CFA, I perform some very elementary bond math on the 10yr treasury showing the risk/return for various movements in interest rates. I then look at...
September 2012
1 post
The QE Aftermath: What it Means and How it’s (not)...
The latest in my recent posts for the CFA Institute. I think overall I am more bullish on the actual economic impact that QE has had via the refinancing channel (it’s very material), but maybe more skeptical on how perilous of a hole the Fed is digging itself into by buying so much of the Agency MBS market. I obviously think the ramifications and understanding of QE are crucial in the day...
August 2012
3 posts
Non-Directional Fixed Income Strategies
The below article is my third contribution for the CFA Institute’s new Inside Investing blog. They are making a strong entry into the blog world, and I’m more than happy to write for such a respectable organization. In the coming weeks I plan to dig into the various funds that I discuss below in greater detail including specific bond holdings.
Despite historically low interest...
Fed eyeing a new kind of twist?
To QE or not to QE dominates economic headlines of late. Lost in this debate is a readily available but under the radar tool that the Fed has at its disposal. Slowing global growth, and subsequently lower interest rates, has given credit worthy borrowers an opportunity to continue a now annual tradition of refinancing their mortgage. While many are content, mortgage market participants know that...
HARP: TBTF banks laughing all the way home
The Economics Behind the HARP Program
HARP, The Home Affordable Refinance Program, is a streamline refinance program developed to help borrowers who have continued to make their mortgage payments, but have be unable to refinance due to a decline in their home value. Underwater borrowers have been stuck in a “no-win” situation of sorts, being stuck in a well above market mortgage rate...
July 2012
5 posts
QE3 feels near but here's two reasons why it's...
Late in the afternoon today word came via Bernanke pal Jon Hilsenrath that the Fed could be moving closer to taking additional actions to spur growth. There’s little doubt in my mind that this is indeed the case. In a recent note Bridgewater estimated that in the past few months global growth has slowed from a 3.3% rate down to 1.9%. This lower global growth should inevitably also cause...
Shadow Inventory Trends & Projections Show Worst...
Some really interesting charts today from JP Morgan showing shadow inventory and bank owned properties among others. It’s clear that we are in the midst of a dramatic fall in both overall shadow inventory as well as REO inventory. The second chart, as evidenced by its title, shows where the remaining shadow inventory exists by location.
These trends are obviously not self-sustaining as...
Which banks have felt the greatest impact from...
Earlier this week, I wrote about three mega-cap stocks which I believe are cheap. JP Morgan was one of the choices, and I described how I believe banks are no longer given credit for the value of stable deposit bases. It’s really easy to see why - the Federal Reserve’s QE program removes securities from the system and replaces them with excess reserves. By now it should be well...
5 charts that tell it all on student loans
A great report was put out today by Neal Soss and Dana Saporta of Credit Suisse on the Student Loan situation in the US. Here are five charts that stood out:
Three mega-caps with big value to be unlocked
The ups and downs of the post credit crisis markets are enough to drive the average market participant crazy, and certainly enough to push the average American largely out of stocks. Billions of dollars has continued to flow into bonds, and material inflows to equities haven’t been seen in years. I have written fairly extensively on bonds the past year, and this post will be a break from...
June 2012
2 posts
Heavy Hitter Leaves TCW, Tips Hat to Gundlach
Remember the coup of December 4th 2009? TCW CEO Marc Stern announced the ouster of Jeffrey Gundlach and, to replace him, not the hiring of a new chief investment officer but the acquisition of an entire company, Metropolitan West. Remember the aftermath? Clients cutting bait, outflows of assets, more than 40 TCW professionals quitting to join Gundlach, and recent the explosive growth of their...
Two bonds that DoubleLine bought over $1.7bil of...
While people tend to flock to the DoubleLine Capital conference calls, I’ve always been more interested in tracking the bonds that they buy from month to month. After all, with AUM in the Total Return Fund now exceeding $27bil, they need to be buying a TON of bonds. Where do they see value? How does that fit in with housing and macro views?
In retrospect, the fund has changed a lot over...
May 2012
2 posts
Blame Ben not Jamie
I could write a whole post on whether this whole JP Morgan trading loss is being under or overstated but I won’t. For the record, I think given that the $2bil loss, which is ~0.5% of JPM’s total capital, shows that the magnitude is being a bit overstated. Nevertheless, the concerns of the critics are reasonable. Does Dimon even know what risks JPM is taking? How can the banking...
What history tells us about a potential Greek exit
A number of hours per week for me are spent reading through various pieces of sell-side & independent economic and macro research. The merits of such a practice can be debated, but it no question provides me a “consensus” view of current economic views. Over the last week or two the sell-side has increasingly raised the likelihood of a Greek exit from the Euro. Take for...
April 2012
2 posts
How Spain pays the piper
The plight of Spain is well known among market participants by now. While LTRO temporarily brought government yields (seemingly) under control, here we are four months later with 10yr Spanish yields pushing 6%. The concerns, among others, entail:
Spanish unemployment recently surpassed 23% and is even higher among the younger generation. Some say that underground markets skew these figures to...
The Market's Obsessive Fixation on The Fed & QE
Every passing speech by chairman Ben Bernanke or release of the latest Fed minutes comes with the increasingly obvious reality that the market is 100% fixated on the Fed. This assertion is less than shocking but important when you ascertain the ramifications of future monetary policy outcomes.
Is more QE needed? This is the question that I don’t claim to know and glad I don’t need to...
March 2012
3 posts
The Case for Remaining Long Risk
It’s only natural that investors begin to pause after such a strong rally in risk assets (in less than 3 months), and reassess whether it makes sense to stay long risk. No need to rehash why we have rallied as it’s been a confluence of factors worldwide including better than expected US economic data and a easing of stress in the euro zone. Nonetheless, JP Morgan addressed this very...
Who is REALLY paying in the $25bil TBTF mortgage...
The surprising tale that I will attempt to pen in this blog entry has a very familiar cast of characters; the Obama Administration, the Housing Bubble, “Toxic Mortgages”, and Too Big To Fail “TBTF” Banks among others. While the headline of TBTF banks in a $25bil mortgage settlement is known to many, the underlying details of the settlement are less known and quite...
Rent to Own showing a "buy high sell low" mindset...
In an interesting report today from Deutsche Bank, they write:
“Another all time high for rent-buy in 4Q11. The national rent-buy ratio (rent as a percentage of after-tax mortgage payments or ATMP) increased to 114.9% in 4Q11, the highest recorded level in our database which goes back to 1991. This quarter’s move represents an 810bps increase over 3Q11 and marks the fifth consecutive...
The eventual unwinding of QE: why it's ignored and...
2012, in many ways, has been fairly uneventful thus far consisting of a seemingly endless grind up in the equity markets and a range bound US Treasury market. The most vocal arguments involve whether stocks are “overbought”, will Apple eclipse $500bil in market cap, and predicting the size of the latest Euro-zone LTRO. In other market segments that I so often comment on, real yields...
February 2012
2 posts
Investors too complacent with the Fed's pledge?
If you’re like many investors, you believe the recent communication from the Fed was a game-changer. In last week’s post, I discussed some of the implications that I believe are inherent in such a policy for banks, insurance companies, and other institutions.
In the face of recent positive data, should we continue to believe Bernanke’s pledge? There’s no shortage of...
The Final Frontier: 30yr positive real yields &...
And then there was one. By one, I mean, one “major” tenor on the US Treasury curve with positive real yields. Today, 30yr TIPS ended the day slightly under 60bps. Are inflation expectations falling or nominal yields falling, or both?
A few weeks ago in a post titled “Breaking down 2011’s Monster Move in USTs” , I noted how the lions share of the move in 10yr...
January 2012
6 posts
Supply of quality collateral is short, GSE's are...
There is no doubt that a perceived and/or actual lack of quality collateral exists in the markets today. Let’s take a look at some of the evidence I see and what it could mean for the markets.
In some cases, institutions appear to be hoarding their most pristine collateral as Izabella Kaminska points out here. One of the biggest sources of quality government backed collateral, and the...
Is further economic growth the solution to all?
The following is an excerpt from the blog of Mahmoud El-Gamal, an Economics professor at Rice University. He reflects on the driving focus of economic growth and how many people view it as the only way to happiness and out of poverty. In more ways than one, it’s refreshing to hear perspective such as this:
A man lived alone on his island. Every morning, he went out of his hut, jumped...
Refi Index Surges, Is HARP 2.0 Working?
The Refi index spiked today to levels not seen since November 2010. Many speculate that this is HARP 2.0 related. Will this interation of the program be more successful than the first? Some level of pain may be felt for premium MBS bondholders which include (among others) banks, money managers, insurance companies, and mortgage REITS
Breaking down 2011's monster move in USTs
No doubt a big storyline during 2011 was the massive move lower in Treasury yields - particularly at the long end. Take comfort Bill Gross - there were no shortage of market experts that missed this move. Consider in late May/early June the most bullish forecast among major Wall Street economists was for the 10yr (which was trading at ~3%) was to finish 2011 at a 3.25% yield. The most bullish...
The Chase for Yield Picks Up
During a conversation today with a friend in the fixed income space I remarked how it feels like the chase for yield has been relentless thus far in 2012. Maybe it is the increasingly positive (if only marginally) US economic data, or the lack of bad new in the Eurozone. Either way, the result has been the same - a fairly dramatic demand for yield among fixed income. Consider the following...
December 2011
6 posts
Banks Continue to Stockpile Agency MBS
The reasons why are debatable but the numbers don’t lie: banks continue to accumulate agency MBS in mass amounts. I wrote about this very topic in July with a post called “Banks hoard securities…” Though absolute dollar amounts of loans are actually up since April, the growth is anemic and unable to keep up with rising deposits.
Should the Fed engage in a QE3, they would...
Will upcoming Fed policy "roll the UST curve"?
An interest rate strategist from Credit Suisse brought up an unique point today during a late afternoon CNBC interview. In giving a token “what will rates do during 2012” outlook, he mused about what Fed policy might look like if economic recovery continues at a sluggish pace.
Instead of spitting out a QE3 prediction, his observation was that Bernanke might give further visibility...
Will the 3yr EZ repo be a difference maker?
A mixture of excitement and confusion seems to be in the air prior to this long term repo operation. There seems to be a danger in the market participants mis-interpreting the results and the usage of the proceeds. Demand for the facility will actually come from a handful of different needs. A recent note by JPM helps shed some light on what we know:
Banks can roll over the previous 1-year...
The 5 Best Hedge Fund Manager Status Updates on...
I am a huge fan of Bloomberg - and at this point I probably couldn’t live without it. In your Bloomberg mailbox, you have the option to include “status update” for new messages at the top of your message. Here are a few memorable ones that I’ve seen among prominent hedge fund managers:
1. This well known shareholder activist runs a multi-billion dollar event driven...
Is DBLTX misunderstood? Is the fund victim of...
There’s a saying that goes “Those who predict don’t know, and those who know don’t predict”. Even now, we still live in an age where sell-side analysts remain a prominent and influential part of the investment universe.
With all of that said, can we rightly criticize sell-side analysts for misinterpreting past results and steering less sophisticated potential...
Just Calm Down, Or Is It Really Different This...
Like watching a once dominant athlete that has lost his/her quickness and superior skill set, so has it been watching a number of famous investors either bow out or encounter troubling times. Few will feel sorry for these investment managers who have been humbled by Mr. Market, among them being John Paulson, Bruce Berkowitz, Ken Heebner, Bill Miller, and many others.
Other HF’s who...
November 2011
5 posts
Flow of Funds, Dollar Funding Facilities, and its...
My friend Matt Busigin wrote a great piece yesterday titled “Shorting Euros is a bad way to play the credit crisis”. Looking at what happened to the dollar during the credit crisis of 2008 is compelling and it should force investors to re-evaluate whether shorting Euros is indeed a good play. Building off of his article, I believe looking at funding flows with aide of Fed data can...
Leveraging EFSF looking less likely by the day
The piece posted on Zero Hedge last month by Willem Buiter does a fine job pointing out the math behind the proposal of leveraging the EFSF to cover near term funding needs of Italy & Spain.
However, given that a number of the 17 member EA member states will likely need to be removed due to “stepping out status”, the guarantee commitment ends up being far less than the potential...
Coincident to Lagging diverts from S&P, points...
Deviating from a relatively tight correlation, the Coincident to Lagging ratio fell thiss month and has now either fallen or been flat for seven months in a row. My initial post on this ratio can be found here.
One of the theories behind this ratio is that when the expansion is nearing its final stages both sets of indicators will be rising, but the increase for the coincident will be slower...
Fairholme's Loss Aversion & The Hidden "Clean"...
The “FLNG” function of Bloomberg is one of my many favorites - you can quickly view hedge fund’s 13-F filings and sort by new purchases, sales, etc. This morning I was looking at Berkowitz’s Fairholme Fund (FAIRX) and was taken aback by the concentration in the portfolio.
Almost 55% of the Fairholme Fund is made up by $AIG, $SHLD, $BAC, and $C. I could be entirely wrong,...
A $SINA bull turns bearish - quick hits from...
Call it luck or skill (I don’t really care), but I joyfully rode the SINA train up from the mid 70’s to the mid 130’s earlier this year. For a multitude of reasons, it was difficult not to fall in love with the stock. The company was sitting on nearly a billion of cash, and its user base was growing like few I have ever even heard about (zero to over 100million in no time).
...
October 2011
6 posts
Quick guide to the modified HARP program
The the surprise of almost no one, a modified HARP program was unveiled today. The basic differences versus the initial HARP include:
Eliminating certain risk-based fees for borrowers who refi into shorter-term mortgages.
Removing the current 125% LTV ceiling for fixed rate mortgages backed by Fannie & Freddie.
Waiving certain reps & warranties that lenders commit to in making loans...
Fed Desperation Hits: Get Ready for the Mother of...
In a time when investors are looking for new and innovative solutions to a languishing economy, word leaks of a potential return to the Fed’s bread & butter: Large Scale Asset Purchases (LSAP’s) of massive amounts of Agency MBS.
Since the conclusion of QE2, we’ve witnessed many barometers of the risk trade sell off including High Yield spreads blowing out to over 800bps from...
Could OWS create a run on TBTF banks?
We hear the cries each day, “the movement is growing”, “this is unstoppable” etc… Some pundits and participants within the OWS movement have even called for the average American to take their money out of big banks and move them to either a credit union or community bank. Could OWS actually cause a run on our banks? For the fun of it, let’s see how feasible...
Ranked 536/584 this year, PIMCO turns bullish on...
536 out of 584. That is the 1yr ranking of PIMCO’s Total Return Bond fund as of 9/30/2011 versus other funds in their Lipper intermediate grade fund group. To put this in numbers, PIMCO is up 1.9% YTD versus the category average of 5.9%, all this during the biggest bond rally in history. What is the most famed bond manager to do in light of this performance?
This afternoon’s news...
Prepays are in, who is(not) refinancing, and who...
Well it is confirmed: the best borrowers get the best rates. Shocking huh? Early this evening updated prepayments came out from Fannie Mae, and the results were less than shocking. While it may be unintuitive to some, the reality is that borrowers with the HIGHEST rates are prepaying (refinancing) the SLOWEST.
This subject has been beaten to death, but today’s prepays confirm the...
