Archive for the ‘crisis’ Category
Looking to Loan the Government Some Money for Free?
Posted by Jody Eisenman | Filed under crisis
The US government just completed its’ one month treasury auction today. They sold $20 billion worth at a rate of zero. That’s right. If you were fortunate enough to get any, you effectively loaned money to the good old USA for a zero return. Since there is some time value to money (i.e. a dollar today is worth more than a dollar a month from now), the effective rate is actually negative. By the way, the government received bids totaling four times that amount sold according to Bloomberg. Of course, one can get higher rates if you are willing to lend for longer periods. For example, three month treasuries are yielding the princely rate of .005%. That means if you put $100,000 into a three month treasury bill, you would receive approximately $125 in interest for the three months. It hardly seems worth it, but I guess it’s better than losing money.
The automakers continue to lobby Washington for some sort of bailout/bridge loan/handout. I believe that the reason this is going so slowly (as opposed to the bank bailout) is a combination of factors. The economy has gotten worse, foreclosures are increasing, public opinion is not very favorable and the first bailout doesn’t seem to have had much of an effect on the overall market. I do think that in the end, the government will agree to an assistance package but whether or not this will actually help rescue the industry temporarily or permanently is anyone’s guess.
The Credit Crisis: Are We Approaching a Depression?
Posted by Jody Eisenman | Filed under crisis
Several items on the credit markets continue to dominate economic news. Simply put, these markets continue to remain virtually closed to any bond offering that is not either a US treasury, or an FDIC insured instrument. As such, we are seeing unprecedented spreads between US treasury yields and everything else. For example, today the Port Authority of New York and New Jersey announced that they had received zero bids for a 3 year $300 million taxable bond offering. These notes have the highest short term ratings issued by Moody’s and S & P. Its’ four previous offerings received an average of nine bids. What this means is that potential underwriters (generally large banks like Citi and JP Morgan) do not feel that they can resell them to potential investors.
According to an article in Bloomberg.com, the demand for top rated commercial real estate bonds has also completely collapsed. According to Barclay’s analysts, the spread of these bonds relative to benchmarks is now 11.9%. In January, it was 0.82%. These numbers are reflected in demand. A record $237 billion bonds were sold in 2007. The number for 2008 year to date is $12.2 billion.
Finally, according to John Lonski, the chief investment strategist at Moody’s, current yields on junk bonds imply a default rate of 21%. To put this in perspective, the default rate was 15.4% in 1933 during the depression.
The spread between high yield bonds and treasuries is now astronomical. This spread was around 220 basis points a year ago. It is now close to 2000. What this means is that investors are unwilling to buy any bonds they perceive as risky. Unfortunately, investors are now defining “risk” as anything that’s not US government guaranteed. Under this scenario, companies cannot borrow or refinance their existing debt. Unless this changes, I believe that we are going to be facing bankruptcies of unprecedented levels. In this type of scenario, I further believe that any talk of a bottom in the equity markets is simply way too premature.
The Fed Cuts the Rate to 1%; Stock Market Yawns
Posted by Jody Eisenman | Filed under crisis
The Federal Open Market Committee today cut the fed funds rate by 50 basis points to 1 per cent today. As we discussed earlier, there seems to be very little correlation in trading from one day to the next. Here is part of the statement from the FOMC:
“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”
If you focus on the last sentence, you will see that the Fed actually thinks the credit situation will get worse going forward! This is not exactly awe inspiring for the financial markets going forward.
In other news, the NY Post is reporting that New York is starting to feel the pain:
NY Post: New York Gov. David Paterson said Tuesday that the recession, overspending by the state and Wall Street’s meltdown will result in a record $47 billion deficit over the next four years.
He says the current budget’s shortfall is $1.5 billion and the next fiscal year beginning April 1 will include a $12.5 billion deficit. A month ago, the current deficit was estimated at $1.2 billion.
“New York is at the epicenter of an extraordinary financial crisis on Wall Street,” Paterson said in releasing the state’s mid-year financial reports during a New York City news conference. “We will have no choice but to take bold and aggressive action to reduce state spending.”
Finally, here is an article from the NY Times regarding the across the board layoffs throughout corporate America: Link
So where does this all end? How low can we go? While no one can be really sure, I believe that the going forward earnings on the S&P 500 could be around $60. If you put a price earnings multiple of 12 on that, you come up with a target of 720. However, in a severe recession, this multiple could easily be at 10, or even less. Just to put things in prospective, General Motors was the largest company in the US during the 1930’s. The stock actually got as low as five times earnings (with a dividend yield of 11%). Although I’m not saying we will get there, a P/E multiple of 10 on S&P earnings of 60 would give you a level of 600. The index closed at 930 today.
