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Wednesday, October 10, 2007


Chrysler's out. The expected impact is less than half of a GM strike. Some are implying an much longer strike, though.

Andrew over at Calculated Risk pointed me to an interview with Zoller of YRC:
New York and most of the world get fixated on the credit crunch, since there's a tendency to be mesmerized by the financial markets. But underlying that is the real economy, which is the movement of goods. That economy is driven by people making and shipping stuff. They are not making and shipping as much [right now], and we see that every day.
We've got a window now of about ten weeks or so where we should really see a big increase in shipment volumes as we get ready for Christmas. We have not seen that, and that's a concern. Last year's inventory buildup for Christmas was lower than historical standards, and the season ended up okay - not terrible. This year you have some easy comparisons, so you would expect to see more of a preholiday inventory buildup, but we have not seen that. Maybe it's coming later. Maybe it's not coming.
Whether it's coming or not is mostly related to port shipping, which is why everyone's paying so much attention to September/October. Preliminary data isn't good. November/December retail sales generally account for 20-40% of annual sales, depending on retail type. Last year the big jump was in November, and some stores seem to be cutting prices early to get a jump on this year's season already. (In times of tighter consumer spending, lower income buyers often spread their holiday purchases over a longer time by beginning them earlier.)

There are some excellent posts up at Calculated Risk today. CR just cannot restrain his mirth about NAR's forecasts of existing home sales this year. Every month they solemnly revise them down to somewhat more than YTD data and trend would suggest. It is extremely funny. In general, economic forecasts are supposed to hold for a period of somewhat more than a month and they are supposed to be predictive. This is, I must admit, the first time I have ever seen retrograde economic forecasts that are too optimistic, thus disproving the maxim that hindsight is 20/20. What's even funnier is that the economic press solemnly reports these revisions as if they had any validity.

CR did his annual forecast the old fashioned way. In December 2006, he took his best guess of 5.6-5.8 million, which still looks correct. NAR still has two more months to revise itself into historical reality for 2007, but it is clearly already out of the possible range for 2008. You only get one guess as to whether they are out of range on the upside or the downside! (If you are confused, there is a hint in the comments.)

Goldman Sachs wrote down its stack of CDOs and loan residuals from 3.79 billion to 1.77 billion. A bit over 53% in one quarter!

Tanta has posted a series of posts that contain data about originations. These are very good, and the data is much more worthwhile than anything you get from NAR. It can actually be used to run your own simulations of supply, if you should be so inclined.

Lawrence Yun, who succeeded David Lereah at NAR, is such a hilariously unashamed industry shill that he spawned a watch blog.
Nota Bene: GS didn't say how much was actually a write down and how much they sold so the "hit" is likely to be less than the 53% decline in the outstanding balance.
Rob, there were basically no takers for this stuff. The only way they could have moved them (which multiple financial businesses have now employed) was to have lent some entity most of the money to buy them at a discount. That way you get the thing off your balance sheet. It's anyone's guess as to whether your risk is actually reduced, though.

I'm not sure how well this link will work for you, but the article is John Maulden's The Panic of 2007, which explains CDOs.
Because of the complexity of CDO structure, they are extremely hard to value for sale. They really weren't designed to be liquid assets. One of the ways that CDOs were made to look good was that they are composed of lower tranches of other tranched obligations. Those have high risk but potentially high rewards. When property was appreciating they paid out big. Now? It depends on the strategy followed by the servicers. If the servicers rework loans they may be worth a decent sum, but the senior tranches won't like that.

The residual loan obligations are even worse.

I have no words to possibly explain how bad the asset quality is of a lot of this stuff. For a few of these bond issues, what's left in the pool is so bad that buying them for a sales price of 50% of remaining collateral would return negatively over 3 years, even if you slapped it all back together including servicing. Those losses are going to show in the CDOs.

I'm not kidding. I'm trying to figure out how to convey this without making some actionable statement. You're a smart guy. read Tricia's postings on this thread. There's a reason why the subprime servicers are speeding up their foreclosure values - and that's the residual values. FIFO.

Jim Klinge was right about 50% fire sales pretty soon.
I'm the biggest big complainer of the IBs and HBs failing to mark to market the assets they are carrying crippled on their books. My point is that they must have sold some of this crap in order to justify a new valuation. Even the markdown appears highly gamed. Three months ago par and now 53 cents on the dollar? They are just setting up for a rebound next quarter so as to declare the crisis over. Don't believe then now or next quarter. I'm a bit confused as to how each tranche must have performed in order for the aggregate to suffer such a hit. The lowest tiers must have been worth nothing which makes sense since defaults appear sufficient to pay them nothing perhaps even negative in that they may have had to pay just to get someone else take the loss and do the paperwork. But the topmost tier(s) should have commanded 70-80 cents seeing as that is a handsome return that couldn't get much worse. My first thought was higher but these loan package lifes are likely to be far longer than in the past.

If truly as bad as you describe then even GS doesn't have enough lawyers to aviod some Club Fed time. There's sure to be a teachers retirement fund out there somewhere that paid 102 for some of this in August they are not going to stand still and take their medicine.
I'm not sure how the legal issues will work out.

There is some risk with any investment. I think everyone had gotten complacent, but the issue is an iffy one. For example, these investments are rated by rating firms, and that should tend to be exculpatory. You can sue for a bunch of stuff, but the regulators have been using the ratings of NSRSOs as a benchmark for what is permissible as. Think about taking that into court. How do you make the case that any individual firm was out of line if a supposedly independent and regulator-accepted firm's assessment supported them?

I do think they probably pushed it right down and hope to bring some of it back up. I actually don't blame them for that.

At one point, some of this type of stuff was being shopped around and getting offers of 25-40%, so that gives us some baseline.

As far as I'm concerned, the prospects of MBS are highly linked to the areas of origination. Pools which are predominately in bubbly areas will perform much, much worse than those which have a better geo spread.

If you think about it, a prime loan originated in some areas of Sacramento in say 2005 obviously has a significantly different risk profile that one originated in another area. No one entity has control of the market, but the market is now controlling the players. Let's just say that the diffusion of responsibilty has been successfully accomplished.
MOM I have to agree on a couple of points,the geographical distribution is very important in judging pool quality,especially given the lack of underwiting and the lumpiness of many pools.Also i find it difficult to discuss this subject without saying something that may be actionable.BTW we are seeing developments being abandoned now.some nearly complete.I expect the best outcome for some developments is a quick bulldozing.
OT, but kind of following up on your Progressive comment.

This morning, I almost got swiped by a cellphone talking Hummer H2 driver, and I thought that one of first things to go from a budget would be auto insurance (or maybe cancel mid-way and get some of that premium back?). People have to pay gas and loan payments but insurance is matter of risk management.

I know in Texas, you can get one day coverage to pass inspections. I'm not sure about California (where I currently live)....
Uggh, Tom. It's not nice to hear about development wreckage. I know there was some around Phoenix last year. Do you think that some of it is cash flow, and that the developer fire sales might bring in enough to get those moving again?

DannyHSDad - Glad it was "almost swiped"! Those Hummers really pack a hit. I don't know about CA laws, but the most common thing is to go to the legal minimum in states with a low legal minimum. I think GA's is still $30/$15, which really doesn't offer much protection. I pay extra for un/under insured protection. In times like these, it's a good precaution.

But yes, buying food and gas to get to work is quite a challenge for some people right now. It's no surprise that auto insurers are scrambling. Understated inflation has hit very, very hard over the last two years.
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