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Thursday, October 04, 2007

It Is Shocking

Just so you know that I'm not paranoid:
Subprime mortgage bonds created in the first half of 2007 contain loans that are going delinquent at the fastest rate ever, according to Moody's Investors Service.

The average rate of ``serious loan delinquencies'' in the bonds has been higher than 2006 bonds, New York-based Moody's analysts Ariel Weil and Amita Shrivastava wrote in a report today. Serious loan delinquencies are those 60 days or more past due, including properties in foreclosure or already foreclosed upon.

``It is shocking what you see,'' said Kyle Bass of Hayman Advisors LP, a Dallas-based hedge fund that reported a 400 percent return on its bet the U.S. housing market would fall. ``Anything securitized in 2007 has got to have the worst collateral performance of any trust I've seen in my life.''
I see bad loans! Many of them! Note that as this wears on the carefully modulated phrasing of the investment crowd gives way to plain language. I thought last year's vintages looked "ghastly", so I am at a loss as to how to describe this year's vintages. Ghoulish?

Any soothing words you hear about commercial paper are opium for traders, because what's happening now is that commercial is beginning to follow residential. So if residential is going bust, and commercial is entering the downward spiral, there ain't much positive on the horizon. Because of that, financial debt is starting to show some risk premiums. The high ratio of financial corporate profits/all other corporate profits indicate that weakness in capital spending is to be expected for a time.

We are expecting manufacturing to take a long slow climb up due to the weakened dollar, but this morning's preliminary manufacturing report was quite disappointing. We are also expecting foreign money to start buying actual domestic US ventures or pieces of them, as in mines and manufacturing. This should stimulate capital spending and thus the domestic economy. It will take a while to figure out how strong that trend will be.

In the meantime, I have started worrying about matters such as flipping ships in construction:
"We saw a new capesize bulker ordered from a shipyard last February at $82m for delivery in 2009, re-sold before any work had started on it in April for $92m and then sold again three months later for $120m," says Alan Marsh, chief executive of London-based shipbroker, Braemar Seascope.
To me the world looks very bubbly, and in at least some cases, the bubble is out of relationship to the ability of the consumers of the world to pay related prices.


The ship flip doesn't surprise me. We've seen it for three years in the oild industry as some very smart investors 'bought' drillships and other major capital equipment. What has happened is that the drilling contractors saw a huge upturn in dayrates and demand for the big deep drillers went through the roof. The investors had metal cut and shipyard time booked.

The shipyard time is the big thing here. There just isn't any more capacity. If you need a ship now, you can expect delivery in 2010-2011 as all of the slots are full.

A global downturn could see some cancellations but we're alrady quoting equipment for ships due to deliver in 2011.

Thanks for the input, MC. One thing I noticed is that some of the Asian lines seemed to be turning over in ownership, and that lately the prices seem to be going down. Any clues?
Excuse my soon to be obvious ignorance but I was under the impression that what happened was every assembly berth was full of 1] deep drill ships 2] petrol segmented ships and 3] luxocruise segments each fighting for fewer and fewer assembly spots.

I said I was ignorant. Be kind.
Rob, I'm ignorant too. My best quality is that I'm well aware of being ignorant, so I seek out people who seem not to be.

Regarding the ship flipping and cheap line sales, you might find this article interesting.

The current problems with the oversupply of retail space were forecast by widespread sales of their interests by some property mgmt firms with really strong and long backgrounds. Because of that, I am watching some of the shipping line sales very closely. It seems to me that there is a new "unloading" trend by some firms with a very long background. They must be seeing something.
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