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Monday, November 26, 2007

The Market Has Moved

The UK and Europe are getting hit. The epic saga of Northern Rock (it turns out that a lot of its mortgages may really be owned by offshore investors) continues, the reality that other UK mortgage banks have major problems is beginning to sink in, and the losses in commercial real estate in the UK are mounting, causing at least one fund to warn investors:
The commercial property market is trading at up to 15pc below its peak, one of Britain's biggest property fund managers has warned.

Schroders said investors redeeming their investments from its £2bn flagship exempt property unit trust fund may now have to wait longer than the normal three months to receive their money, allowing the fund manager "flexibility to make disposals at fair value".
William Hill, head of property at Schroders, said: "Our view, supported by the independent valuer, is that there is clear evidence that the market is now trading at some 10pc to 15pc less than its peak and we have therefore set the redemption price at 12.5pc below the September valuation. The market has moved and there is nothing to be gained by us putting our heads in the sand and pretending otherwise."
HSBC's problems continue:
HSBC Holdings Plc, Europe's largest bank, will bail out two structured investment vehicles, taking on $45 billion of assets to avoid a fire sale of bond holdings.

Investors in Cullinan Finance Ltd. and Asscher Finance Ltd. will be allowed to exchange their holdings for debt issued by a new company backed by loans from HSBC, the London-based bank said in a statement today. HSBC said it doesn't expect any ``material impact'' on its earnings or capital strength.
Plus they still are taking losses on their on-balance sheet RE portfolio. According to the article, HSBC's SIV holdings are the largest after Citibank's. In the meantime, the Super-SIV effort led by Citi is still flailing along. For some reason, investors aren't thrilled at taking someone else's bad paper.

Both of these SIV problems are the result of the breakdown in the ABCP market.

This is the day the suspension in mortgage trading in Europe was supposed to be lifted. We will see the results. The European Central Bank announced on Saturday that it would throw tons of money into the market this week, just like it did this summer.

Right now all of the players are talking about "liquidity", and holding out the hope that things will be different in a few months. I think they will be different. They'll be worse.

Bad loans are going to default all over, and the resulting decline in property values leaves all these debt obligations worth less and less on the market as valuations slowly drop. The alternative is to hold the paper until maturity if it performs. That will not be possible for many players, and if it were, the sudden drop in money circulation would have a dire effect on the economies involved.

No one knows how to fix this. The way to compensate for what is essentially the wholesale destruction of money is to lower rates, but everyone's afraid to do that for fear of being carry-traded. The battle now is to keep money flowing into economies from the outside.

The ECB is hoping that it can throw this money out there, and banks will take the cheap funding and use it to buy questionable assets without demanding that the price of those assets be marked down too much, or take the money and use it to bail out their own leaky balance sheets without selling the paper. Why? Well, the reason they would do so is to prevent having to further mark down their own assets. This means that the banks who would buy would be taking on questionable investments in order to cover questionable investments. This is exactly the strategy that Japan used when its real estate bubble burst, and the result was two decades of economic stagnation.

This is a grim situation and there are no signs of improvement. Holes are now developing in the Asian markets as well.

Sales tax receipt data in the US seems to confirm that consumer spending is flagging considerably. The recession word is getting considerably more usage.

Hi Mama,

Do you have a link for sales tax data?
John, by far and away the best sales tax data out there comes from the Rockefeller Institute. However it comes with a big lag. Otherwise, you have to go and find the data from the state websites. Most of them publish it. The Liscio Report publishes a much more timely survey, but you have to pay for that.

There was a clear step down over August-October according to the states I am tracking.
I know how to fix it. Take the overnight rates down 50 bpts every month. Issue Treasury Bills by the billions. Take mortgages in repo operations. Make Goldman mark it's Level 3 assets. Oh, yeah...and give it about 3 years.
Right now all of the players are talking about "liquidity", and holding out the hope that things will be different in a few months. I think they will be different. They'll be worse.

You have a style of writing that lures us in for the kill. We often feel it coming, much like a punch line to a good joke. Unfortunately, our economy is slowly becoming what looks to be a very bad joke (and the joke is on us).
I'll say! I feel like one of those cartoon characters that always takes it in the kisser. Maybe Charlie Brown?
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