Thursday, April 10, 2008
It's Thursday, But Not A Nice One
The Bank of England cut the benchmark interest rate for the third time since December as higher credit costs and the worst housing slump in 16 years threatened to push the economy into a recession.ECB did not, but they are already at 4%. It does seem exceedingly likely that they will start cutting around the third or fourth quarter of 2008.
Former Chancellor of the Exchequer Nigel Lawson said yesterday Britain is headed for a ``prolonged'' recession as the seizure in credit markets prompts banks to choke off the cheap loans that fueled a decade-long boom in consumer spending. The slowdown has encouraged policy makers to keep up the pace of rate cuts and set aside concerns about inflation, which reached a nine- month high in February.
The US muni market is about to get a bit shaken up, because Jefferson County, AL, is in danger of default. Stories such as these are going to hurt some bonds quite a bit as investors no longer count on monoline bond insurance and instead turn their attention to underlying risks.
Unemployment claims provide no reassurance today. Last week's SA claims were revised up to 410,000, and this week's SA claims are now listed at 357,000, which is bizarrely less than NSA claims at 359,057. The original release on the website this morning had different numbers, btw!. The NSA claim progession for the most recent three weeks is now 316,598 > 345,994 > 359,057. Not a very pretty picture! The seasonal adjustments can get a bit odd due to spring breaks at colleges, and if BLS hits this right the rise in claims could be from higher education shutdowns for a couple of weeks.
The NSA insured unemployment rate is now 0.4% above the prior year's, and the SA rate is 0.3% above the prior year's. Next week's release should have the April base employment adjustment in it, so it could pop right down. Continuing claims are up about 530,000 from the prior year's, or 18.5% YoY.
Otherwise the big news is the disclosure about Goldman Sachs' Level 3 assets, which is actually yesterday's news:
Goldman's so-called Level 3 assets surged 39 percent to $96.4 billion at the end of February from $69.2 billion in November, according to a filing with the U.S. Securities and Exchange Commission today. The ratio of Level 3 to total assets rose to 8.1 percent from 6.2 percent.I wonder if this doesn't have to do with the recent decision regarding distressed sales of assets. That ruling was that if the only market sales were distressed or forced, you did not have to mark to market. Instead the assets would end up in Level 3. Regardless, these numbers should raise more than a few eyebrows. At the minimum, we are being told that GS is not very liquid. The SEC letter is here:
Fair value assumes the exchange of assets or liabilities in orderly transactions. Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability. Current market conditions may require you to use valuation models that require significant unobservable inputs for some of your assets and liabilities. As a consequence, as of January 1, 2008, you will classify these assets and liabilities as Level 3 measurements under SFAS 157.So GS' rising Level 3's may reflect a thorough application of the above. I will be watching Level 3 assets with great attention. What is the definition of a distress sale in this market?
When I saw the GS news yesterday, I spent hours thinking about it.
Then, to cap it all off, I read his Forecast for 2008...
I sure hope it ain't so, but it has me worried. Hello, Long Emergency?
We already covered the extreme probability that the agency MBS devaluation is real. I suppose the Fed's recent action to open the discount window sets a floor of -10%, but for FMV 90-95 is a no-brainer.
The only other way to value those is on income, but you have to offset for duration. (In any plausible financial universe.)
And then we know that Goldman went vertical in some of the madness. I could go on about other business components, but the bottom line is that we can't resolve liquidity without clarity.
Otherwise we're back to Joseph and the famine, and the Fed winds up holding everything. That's not a financial market.
They must be mocked and scorned wherever sighted.
American public has been neutered by the so-called professional & financial class.
Strongly think some things like the old Tea Party have to occur too.
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