Downgrade

A downgrade doesn't have to hurt a stock.

First this:

The market for the hybrid debt of British banks was rather roiled last week
First there was news that Northern Rock would be deferring payment of its suboordinated debt coupons. Then then there was a mass-downgrade of the hybrid debt of banks including Lloyds and RBS, from ratings agency Fitch. In short, things are happening in the market — and they haven’t been all that good.
As a reminder, hybrid, or suboordinated debt, has characteristics of both equity and debt, and forms an important part of banks’ capital cushions.
On Tuesday, Northern Rock deferred coupon payments on some of its hybrid debt in an effort to conserve its capital base, which has fallen below minimum requirements since the bank was nationalised in 2008. The bond payments can legally be deferred without counting as a default — something which enables them to qualify as regulatory capital in the first place.
The thinking behind Fitch’s Thursday downgrade of RBS’ and Lloyds’ hybrid debt, meanwhile, is that there’s an increased risk of other such coupon deferrals after the European Commission introduced the concept of “burden-sharing” for bond - and shareholders. That’s a nice way of saying that bondholders will have to share some of the pain involved in bank bailouts — the lack of which formed a prime criticism of bank bailouts earlier this year.

Please note that not only Britsih Banks are involved in the Fitch action also other European banks got a letter where their hybrid debt was downgraded.

However, on the Belgian stock exchange is KBC (bank) rising another 5% today.

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Spain: a warning...

It’s Friday.
Fridays are never the same.
In what shape they come, they always look special.

Now, consider this piece of research about Spanish banks coming from the house Variant Perceptions.
The consequences can be dire for Europe

Spain had the mother of all housing bubbles. To put things in perspective, Spain now has as many unsold homes as the US, even though the US is about six times bigger. Spain is roughly 10% of the EU GDP, yet it accounted for 30% of all new homes built since 2000 in the EU. Most of the new homes were financed with capital from abroad, so Spain’s housing crisis is closely tied in with a financing crisis.

The impact on the banking sector will be severe. Consider this: the value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That’s almost 50% of Spanish GDP. Most of these loans will go bad.

Spanish banks, in our view, are now facing a very bleak outlook. Spain’s unemployment rate reached over 17%; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family.We argue and will document anecdotally in this report that:

• The real estate crash in Spain is worse than is widely believed, much as the subprime problem was much worse than people believed

• Spanish banks are hiding their losses and rolling over debt to zombie companies, much as Japan did in the last decade

• Investors are deluding themselves if they believe that Spanish banks are among the strongest in the world. (This is a new theme. See Forbes’s latest “Spanish Banks In Top Form” for an example of the new fawning articles on Spanish banks.)

If we are right, Spain will soon have zombie banks like Japan and it will face a prolonged period of deflation. However, Spain will be much worse.

Why are the banks involved?
Because they wanted to hide the situation

Spanish banks are now the largest real estate holders in Spain. They have come to own properties through many different avenues. In order to hide from the effects of the real estate crash, Spanish banks have been buying properties before the loans on them go bad and trying to dispose of them through their own real estate companies. They have also come to own dozens of thousands of homes through debt for equity swaps. Estimates put the value of property repossessed or swapped for debt by Spanish banks at about €16 billion. Consider the following: Spanish banks are now running their own real estate companies and have websites set up to move their stock. Among selling points are: pricing discounts of 25-50%, financial terms of Euribor plus 0% over 40 years, and guarantees to re-purchase the property in the future.

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Euro-zone exports and Hewlett Packard

The Euro-zone has been hit hard by the collapse in global trade, with exports declining by almost 30% from their peak last year signs are that exports may be picking up again, especially to China and India.

We thank Goldman Sachs for this news.
They also report that:

New jobless claims dropped to 565,000 in the week ending July 3, after 22 weeks above the 600,000 mark. Along with some stabilization in the total number of jobless claimants in recent weeks and a sharp decline in layoff announcements over the past few months, this news offers hope that the worst period of job loss is finally coming to an end.

Now, I disagree.
The new jobless claims are dropping because less people are entitled to receive money from the government. So don’t get fooled…

And this one came from Sillvio Berlusconi himself:
"Everyone was of the opinion that the G-8 isn’t any longer the most ideal structure for dealing with the governance of the world economy,"

Now something else.
Last week I made a mistake. I mentioned Hewlett Packard, but put on the wrong graph. I apologize for this and take another look to this stock.
The point-and-figure chart of HP (ticker: HPQ) was showing a break out. However, one week later the price is going down. One other bad day and this break out will fail.

Our renko chart nails the real nature of the activity of this stock. And the technical story is negative. As we can see here.

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After slamming the brakes...

Stock markets are not longer a proxy for the ‘real’ economy neither is the price action in some other asset classes.
However, we are convinced that the ‘green shoots’ of last months are nothing more than the logical reaction of the economy after we hit the brakes last September with the Lehman and AIG-drama.
Economic activity came abruptly to a halt. The following months, inventories were depleted and the economic activity we experience now is nothing more than an effort to replenish these inventories.
There is economic activity but on a low level.
The global economy is recovering very slowly and it’s not coming to an end soon.
So the recession is here to stay, people will spend less and no way there is inflation in the pipeline.
That means that after the shake-out of dollar and bonds, they will come back in vogue and that is not good news for other markets.
Although we thing that after this correction in stocks another sharp rally can follow.

And there is Europe: 15% of the British economy is linked to the financial industry (in the States only 5%). This oversized sector is still in a downturn and this can hurt the pound. Spain, Portugal, Ireland and Italy can not cut rates in order to deal with the local economic weakness. As a result they must take on more debt, increasing the probability of more rating downgrades. The risk they will leave the EU and go back to their own currencies is growing. Fast.

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No job today... what about tomorrow

What about this message:

If you are 35 years old, have only ever worked in the City and have lost your job, then the chief executive of Britain’s biggest listed recruitment company has a grim message for you on the prospect of a recovery in financial sector employment: “Those jobs have gone and they’re not coming back any time soon.”

These are the words of Alistair Cox from Hays Recruitment.
And I think the guy is right. Especially with what the ECB has in mind, things never will come back as they were. A draft report is expected today from the EU and this report states that there us a strong case for curbing existing rules on banks’ funding needs, accounting reforms and other policy changes in order to prohibit banks to lever themselves again to the tune of 30-1.

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This must be Europe...

From Europe, with love:

ECB's 1-year money: The highlight was of course the huge 1-year provision of money at 1% by the ECB, which has set in motion a decline in money market rates that I suspect will broadly equate what would have happened if they had cut their policy rate to 0.5%. Bending to the evidence that the ECB prefers to provide the last bit of monetary easing via liquidity provisions rather than rate cuts, Goldman changed their forecast for policy rates to “unchanged” at 1% for the next 12 months.

On the policy side: The Spanish government approved a EUR 9bn fund to bail out needy banks, while the Germans are focusing on their fiscal exit strategy via a rule-bound fiscal consolidation that’ll limit the cyclically adjusted deficit to 0.35% from 2016.
Latvia help: In a stunning move, the European Commission announced last Friday that it'll disburse a EUR1.2bn loan tranche to Latvia in the next few weeks as the revised memorandum of understanding between the EC and Latvian government is finalised. This should be positive for CDS spreads for the Baltic states and Sweden, and also (at least temporarily) dampen a potential source of volatility in the CEE region.

Thanks Goldman….

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Free money for all (banks)....

Is it possible for the Russians to stop the slide from rouble and equity markets?
Since the top on June 1 the rouble-based Micex went down with 24%.
All right then, it’s not the only sector losing height.
As we mentioned yesterday.

But help is coming. From the ECB auctioning 442.2 bln euro’s today for one year at 1%. Euro rates fell to record lows.
As is illustrated by the overnight rates.
A success in terms of driving down rates. In terms of excess reserves this bargain opportunity gave banks the opportunity to stock up euro cash to an excess of some 270 bln euro.
Thank you ECB.
Last week the ECB said that eurozone banks could face 283 bln EUR losses before 2011.
Well, this makes pretty up for it, not?
No wonder European banks are going higher.
Don’t forget: there is still a FOMC meeting going on.

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Someone want to buy a house in Spain?

Can you stimulate an economy with a printing press?
Japan is trying it for almost 19 years now, so the answer is obviously: ‘no’.
Printing money is issuing debt. And printing more debt cannot reverse a debt bubble until market forces have run their course.
The trend for this very moment is deflationary. And almost all asset classes are down, because the economy is readjusting.
Not only in the States, but everywhere.

From Reuters:

MADRID, June 16 (Reuters) - The number of houses sold in Spain fell by 47.6 percent in April compared to a year earlier, marking the largest percentage fall in 16-straight months of decline, the National Statistics Institute said on Tuesday.The fall in April sales to 29,217 units compared with a decline of 24.3 percent in March versus the same month of 2008, which had been the smallest fall in 11 months.


Moody’s downgraded 25 Spanish banks last Friday.
The unemployment rate in Spain is now 17.4% and is expected to go higher. The non-performing loan rate is still going higher: from 3.3% in December 2008 to 4.27% at the end of March 2009.

The Ronaldo effect?

Now what about this ad, back in the UK:

DON’T MISS OUT ON THE OPPORTUNITY OF A LIFETIME

UK house builder Taylor Woodrow de España, the only major UK house builder in Spain, discusses why the time is now right to purchase a home in Spain as the current climate makes purchasing the home of your dreams possible.
Victor Sague, Marketing Director of Taylor Woodrow de España comments: “For many months consumer confidence in the property market has been dented and quite frankly who can blame house hunters becoming subdued when it comes to making possibly the biggest investment of their lifetime.
However, at this moment in time we are currently seeing a number of people returning to the market, anxious not to miss out of some of the excellent deals that are currently available both at home and abroad.
Victor continues: “With the market looking brighter, this will of course add inflationary pressure onto house prices, the moment confidence returns. Indeed, house hunters that are unable to move quickly will know doubt miss out on the chance, of possibly their lifetime, to buy at the bottom of the market.

Indeed :-), plenty of houses over there now. We're not in a hurry

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Latvia

The End.
So far for the city of Riga.
Crisis is brewing.
The Baltic will burn anytime soon now.

RIGA, June 3 (Reuters) - The Latvian treasury failed on Wednesday to sell any of the 50 million Latvian lats ($100.7 million) of various treasury bills offered for sale on Wednesday, the stock exchange said.The failure to attract offers for the paper came as the Latvian market remained frozen due to worries about the currency, which some fear faces a devaluation, and amid central bank buying of the lat to keep it within its peg to the euro.

The euro peg will be abandoned in the next days. The FX markets smell the smoke and are selling the Swedish Krona, the Zloty and so many others versus the euro.

From RBS Research:

Net-net though, and whatever your view of fixed exchange rate versus floating regimes, the current status quo is clearly unsustainable, with local rates up thru 100%, and the Bank of Latvia bleeding FX reserves. Time is clearly running out. While devaluation is not without costs, it would clear the air, and in a trade off with the current huge pace of real GDP contraction/mounting fiscal problems surely cannot be much worse than the slow death being wreaked on the Latvian economy by fixed exchange rate orthodoxy.

The original reason for the introduction of the currency pegs was to provide the fiscal foundations and stability to help satisfy the Maastricht criteria essential for euro membership. But the current parlous state of the Baltic nations’ finances and the reality that their economies are in a collective stupor make it hard to see the rationale in retaining fixed exchange rates; euro accession is now categorically not imminent. Who will be first to realize they have little to lose by dropping the peg?


Hardest hit once this mechanism gets under way will be the foreign lenders. Swedish banks but also others because the value of their loaned assets will decimate. The credit, supplied across the Baltic region will dry up and cause another crisis with the banks involved.
Now what if the Balkan follows later?
For starters: think about Belgian bank KBC, Italian Unicredito and others – AIB? -

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The shape of the interest rate curve

Security KAG has created a chart of the US Yield curve describing how the spread between rates of 3 months, 5 years and 30 years are developing since 1991. The yield curve went almost flat in 2006. That was the time to set up a steepener. Now we’re on our way back to flattening.
Well… we all could have been rich by following this chart.

Flattening was the case until recently.
The long term interest rates of US Treasuries are rising and prices imploding.

We can make the same exercise for Europe.

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Housing is not getting any better...

12% of all American homeowners with a mortgage are behind on their payments or in foreclosure. Half of all adjustable-rate loans to borrowers with a weak credit record were past due or in foreclosure and we still have tons more option ARM mortgages which will switch to new rates in the coming months.
New home sales rise, but the Administration is revising the prior month substantially, hoping the market wouldn’t see it.
Why is homebuilder confidence climbing to an eight-month high?
With mortgage rates at pre-QE levels.
Rates are rushing higher, so it is clear that the FED will come out very soon with a QE v.2.

Consider this:
There are 80 million US houses.

53 million have mortgages.

27 million are paid off.

48 million are paying in time.

5 million are behind (9,5% of 53 million with 2.8% in foreclosure)

In the 1930's 50% were seriously delinquent.(Data: US Treasury, Milken Institute)

But also Europe is not going to escape. From John Mauldin:

The value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That's almost 50% of Spanish GDP. Most of these loans will go bad.

"Spanish banks are now facing a very bleak outlook. Spain's unemployment rate reached over 17% last month; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family. Spain and Ireland had the worst housing bubbles in the world and now Spain has as many unsold homes as the US, even though the US is about six times bigger.

"Why are Spanish banks not insolvent? Spanish banks are not marking their real estate loans to market. We've often wondered how it is that our thesis for Spanish real estate and industrial collapse has not created more victims. The answer is simple according to an article in Expansion, the Spanish equivalent of the Financial Times, from the 19th of April titled 'Spanish banks control half of all real estate appraisals.' You can't make this stuff up. We haven’t even begun to see the worst in Spain yet."

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Unemployment

Although it’s difficult to compare the unemployment rate of Europe with the States, the ‘official’ US jobless rate is on his way to pass Europe’s. After Spain and Lithuania the States ranks third now:

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Time to sell my 911

Not so long ago Porsche was able to squeeze the hedge fund community with an option construction. It seems this is coming back to haunt the carmaker. On Bloomberg we found an article opining that Porsche could lose some of the 17.3 bln € paper profits they made from holding VW options because they have no money to exercise them. Through these options P. is able to control 70% of Volkswagen, but now they need to cash them before they expire.
Exercising options on 20 percent of VW’s 294.9 million outstanding shares at the strike price estimated by analysts would require 5.9 billion euros, according to data compiled by Bloomberg. The 20 percent stake would have a market value of 14.1 billion euros, based on yesterday’s price.

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EUR/USD

There is a technical event in the FX-markets. For the first time since 2005 the EUR/USD is moving above its 200 day moving average. Will the dollar lose more the coming months? Those caught long on the dollar will become quite nervous.

Hey boys and girls out there, it was another eventful week: time to close shop and to go down to the pub for a good pint of Guinness. Cheers to everybody and enjoy your weekend.

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Best places I know...

Brussels is boring, states an OECD report.
Well, maybe. Though you can wine and dine as nowhere else and taste more beers than you can dream about.
Even the same OECD report states that the best dining city is Paris – it’s clear that these officials don’t have to pay the bill themselves...
But more about the French in this report:

The French spend more time sleeping than anyone else in OECD countries. They also devote more time to eating than anyone else and nearly double that of Americans, Canadians or Mexicans. The Japanese sleep nearly an hour less every night than the French and also spend longer at work and commuting than they do indulging in leisure activities.

I happen to know some French people in Dublin.
Nice folks and so very … French.
Always in for a good night at Lillie’s Bordello.

Et maintenant, des nouvelles concernant la région bordelaise et le récolte de 2008.
It’s the Live-ex index of fine wine prices which is tracking the price of French finest. Take a look to the price of a crate of 2008 Lafite.

Now this is called a parabolic price rise.

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Wirtschaftwissenschaft - German style

A German soap. We learn that Volkswagen is considering a bid for Porsche’s automotive business. While Porsche still tries to seize VW, an operation which started three and a half years ago. What to say about all those hedge funds which lost billions a couple of months ago with the squeeze of the year propelling prices of VW to 900 EUR.

They always surprise is....

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A change of rules for Europe?

He’s back, my favorite accountant of Dublin. Good ol’ Charlie McGreevy, the Internal Market Commissioner of the EU calls upon the International Accounting Standards Board to consider a change of one of its rules to align with the reform of its US equivalent allowing European banks to have more flexibility in valuing toxic assets.
As said before: even this will boost bank earnings and improve the capital levels, it doesn’t take away the roots of the problem: funding this stuff and the liquidity of these markets.
As we stumble deeper and deeper in the economic abyss, banks want to get rid of this toxic waste because repayment at maturity becomes more and more a problem. But they can’t, coz’ there is no market left.
Now, abolishing M2M makes sense if you have a central bank doped with quantitative easing. Not the ECB…
Hey Charlie, dear, what about IAS 39 you once favored, where fair value was the sacred cow?

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G20 and then some...

The ECB is lowering their benchmark rate with 25bp tot 1.25%. Everybody was awaiting 50 bp. Hey, Europe seems to be in a better shape than everybody is assuming. This crisis is between the ears, of course.
Elsewhere we will hear more today of the FASB’s amendment to mark-to-market accounting rules, set to be approved today.

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No evidence - part 1

Consider this headline:
GERMAN FINANCIAL WATCHDOG BAFIN SAYS HAS ENDED SHORT-SQUEEZE PROBE INTO VOLKSWAGEN SHARES NO EVIDENCE OF WRONG DOING.

They are all the same, now aren’t they, those watchdogs.
Porsche made a 6.8 bln EUR profit from its options in Volkswagen, lifting its pretax profit to more than twice its revenue. As long no Germans were screwed in this process, Bafin can not discover anything irregular in one of the most amazing trades of the last decennium.

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Titanic

According to Bloomberg: About 45 percent of U.S. rigs have been shut since September, which means fourth-quarter gas production will tumble 5.2 percent, faster than the 1.9 percent decline in use, the Energy Department forecast. Prices will rise to $7 per million British thermal units by January from $3.897 today on the New York Mercantile Exchange, according to a Bloomberg News survey of 20 analysts. The gain would be the largest since the first half of 2008.

But this is Bloomberg.
We become a little prudent as prices are going nowhere.
Last weeks we mentioned natural gas and copper.
All their upward price movements are stalled.
Even de Baltic Dry index is not going higher for the moment. Now be careful with charts where you can click in the box for a log scale of not.
As markets are at the bottom charts without logarithmic scaling are less sexy than with a log scale.

But anyway…

Rapidly deteriorating conditions in the shipping sector are squeezing the ratings on European banks exposed to the shipping industry. Many shipping companies are struggling following a sharp downturn in global trade and challenging funding conditions. We expect these difficulties to result in a material increase in banks’ loan loss provisions. We see pressure on banks coming from an increasing number of loan defaults, rapidly deteriorating shipping company credit quality, and weaker recovery expectations due to falling asset values. In addition, we believe banks’ capital ratios may decline as deteriorating creditworthiness feeds through internal rating models and increases the relative risk-weighting under Basel II.

European banks are especially exposed to drybulk and container shipping, the fundamentals of which are “particularly weak.”
The S&P analysts highlighted seven banks with significant shipping exposures - DnB NO, DVB, KfW IPEX-Bank, NIBC, HSH Nordbank, Norddeutsche Landesbank Girozentrale and Nordea.

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