US Securitised Mortgage Market - A Summary

In the previous blog entry, I talked briefly about the state of the US mortgage market and Banks' attitude towards it. Today, I like to give a summary of the former to give better all-round understanding of the issues at hand.

Essentially, the entire US mortgage market is about USD 10 trillion. The securitised portion of it, in other words, those re-packaged and sold to investors is about USD 7 trillion. Of these, about USD3 trillion are considered non-prime assets and they included the Jumbos, the Alt-A and the sub-prime mortgages. To drill it down further, about half of them ie. USD 1.5 trillion was issued during the fraudulent years of 2005-2007. I called them fraud as the practises of the housing brokers, middleman, banks, credit agencies etc were then void of integrity and were over-run with greed. And now, it is payback time...

Looking at the latest US mortgage remittances data, it is a stark reminder of the reality at hand. The crisis is not over and the asset markets will be disappointed.

There was little to cheer about in the survey. Green shoots were certainly choked to death by the brown weeds of despair. In the Jumbo market, delinquencies have hit 15% in some cases and rating agencies generally expect actual losses to touch 7% for mortgages that originated in 2007 (the most permissive period). In the Alt-A sector, the statistics become more frightening with current delinquencies already hitting 40% in the 2007 vintages. Roughly speaking, 4 in 10 borrowers have fallen behind in their mortgage payment. Finally, in the sub-prime market, the total delinquency rate was in excess of 50%.

In all 3 cases, their respective repackaged AAA bonds would be in danger of default. Of course, one could say that this is already priced into the banking system. But the fact remains - the bonds will default.

In the meantime, foreclosures would continue to rise throughout 2009-2010. This would dampen house prices in the US and the negative wealth effect created could curtail spending. This in turn could result in higher unemployment rate and a further increase in the negative wealth effect. In short, the risk of a further slowdown in consumer spending and a rise in the saving rates in US could continue to hurt Asian exporters, well into 2010.

But, do we sense that? No. By the way, I had to queue to get in to the Thai Village Sharksfin on Friday. No recession in Singapore, yet.

Are We Immunized Against it?

No... I was not referring to the H1N1 flu, which someone told me one unfortunate air-stewardess referred to as the dreaded HINI (Hee Nee) flu. Poor girl, she was probably grounded after that.

Here, I am referring to Banks' attitude towards lending. Apparently, US banks have tightened their lending standards, after experiencing near-death. As one lender puts it : " Six years ago, standards were pretty permissive; and two years ago, all you needed was a pulse. These days, people who have reserves that equal the amount of the loan are getting rejected."

Now throw in the recent 2% rise in 30 years US Treasuries, which is the common benchmark for US mortgages, the lending becomes near impossible. Consequently, the 2.1 million unoccupied houses in the US will impede any recovery. Including the available for sale properties, it would take close to 10 months, just to unload them. Four months into President Obama's tenure, Housing, the engine that powered every US recovery since 1960 is stalled. The lousy job market, with unemployment rate expected to hit 10% have made things worse.

Still, the market wants to believe that this time around it would be different - Government spending will kick-start housing, and then consumer spending comes around to kick-start the economy. Seems simple enough... But, the US home-owners are still waiting for that to happen.

In the meantime, US Banks remain trigger-shy. Is this contagious? Hopefully not. With Asian exports still weakening, Asia will increasingly have to depend on domestic consumption, and a credit-shy banking system will not help. Now in Singapore, considering the currently available 1% mortgage rates, I must say we are immunized and that my concerns are misplaced. In fact, I am impressed by the confidence Banks have on consumers. May be it is the belief that Singaporeans don't default on their homes. Well, let see as the story unfolds.

Closing the Week Strongly

Barring a dramatic collapse, equities will close the week strongly. And why not? The weekly data out of US and Asia has been relatively benign.

In US, the Treasury funding program went smoothly, particularly the 7yr Treasury auction. It was a vote of confidence for the US. Meanwhile, the Fed Chairman, Ben Bernanke's positive assessment of the economy (that it was recovering) was also well received by the market. Merger and acquisition talks in the US added the icing to the bullish cake.

In Asia, the PBOC said monetary policies would remain accommodative as the Authorities were still concerned over the sustainability of the recovery. In Korea, BOK made similar comments, when they said the expansionary policies would be kept in place until clear signs of the recovery emerged. In a nutshell, Government around the world seemed less optimistic than the stock markets, and have vowed to keep interest rates low. That's great news for the stock market that has chosen to focus on the low interest rate bit, and ignored the growth concerns of the Authorities. This is a complete 180-degrees turn in sentiments... just 3 months ago, the market would have focused on the growth concerns and ignored completely the low interest rates and fiscal stimulus that were put in place.

This make a mockery out of financial theories that advocate perfect markets; that prices are "perfect" and always reflect all available information. In the latest survey of its members by Britain's Chartered Financial Analyst Institute, over two-third of the members rejected this proposition. More than 77% now believed investors behave rationally. Sounds like an urgent rewriting of textbooks is needed quickly.

So, will it be plain sailing for the rest of the year? Not according to Warren Buffet. In fact, Mr Buffet reckoned the recovery willl be so tepid, that a second round of stimulus may be necessary. Does the stock market think so? No. And right now, the Bulls are charging...

Hi Mom, I need Help....

It started out as an uneventful day, with markets hugging close to the zero line, until about 11am when markets like Taiwan moved up sharply, dragging the rest of Asia higher.

This was on the back of rumors of closer China-Taiwan relationship and financial co-operation between the 2 nations. Consequently, Taiwanese banks and other blue chip stocks spiked higher. By midday, the "rumor" was confirmed as Taiwan announced it was sending 13 Cabinet Ministers to China in early July for talks on forging closer relationship. Subsequently, the Taiwan Stock Index posed an intraday high of 6511 or a 5% intraday gain, before succumbing to late profit taking.

In the meantime, this "game-changing" news began to spillover to the other markets. HK and Singapore, in particular, began to share this optimism and traded higher. For me, I found this amusing. I can understand HK (trading higher), but Singapore reacting so favorably to this? In many ways, I have always assumed Taiwan and Singapore to be competitors. And more business for Taiwan must surely be at the expense of Singapore? I guess my stock market friends see things differently. This was the catalyst for them to re-position themselves after so many down days.

Nonetheless, this is an optimism I don't quite share. In the near term, credit markets (void of retail interests) which have proven to lead asset turning points still suggested more risk aversion. I think more market consolidation is needed.

North Korea Grabs World Attention

Come 2010, soccer fans will see 2 Koreas in action at the World's most prestigious soccer event. Both the South and North Korea qualified for the 2010 World Cup.

I would have thought that North Korea's qualification which came at the expense of Iran (I guess FIFA can only deal with 1 axis of evil at a time), would be great for their sponsors, ERKE, the subsidiary of Singapore listed China HongXing Sports Ltd, but I was wrong. Instead, since North Korea's qualification, China HongXing Sports (CHHS) has lost another 10%, bringing their month-to-date loss to about 30%. So maybe CHHS has a crap balance sheet? Wrong again. Unless the accounts have been cooked, I see net cash of 18c, compared to the current closing of 13.5c...

In the meantime, North Korea is also grabbing attention in a less desirable way. Since their missile-testing launch and nuclear testing in May, there has been increasing reports of a long-range missile test scheduled for 4 July, one capable of reaching Hawaii. US Defense Secretary, Robert Gates, subsequently ordered US military to take defensive measure. To add credibility to this, North Korea has closed its coastal waters to shipping, in view of a "military exercise" in that area.

Meanwhile, a suspicious North Korean ship has been monitored to be sailing past Shanghai. The ship is suspected of carrying illicit weapons en route to Myanmar, where the Burmese Junta is known to be supporters of North Korea's military technology. While being trailed by a US Destroyer, a high-sea interception is unlikely.

Still, with so much geo-political risk in the pipeline, one would have thought Asian markets should be trading more cautiously. But the fact remains: Asia is up 30% in 2009 (so far). Oh well, I guess the market's idea of pricing in the North Korean risk, is to hit out at their sports sponsors, CHHS, in protest of the regime's provocative manners...... And we say Mr Kim is irrational?

Doctor Prescribes Caution

Saul Doctor (that's his name), European Credit Derivatives Strategy, JP Morgan, has warned that technical signals have turned bearish in the credit markets. 3 indicators that he uses have all turned negative. The RSI and "House of Cards" Index turned negative last week, and on Friday, the third of their indicator, the "Momentum" Index turned as well.

Essentially, these indicators have been designed to pick the turning points in the credit sentiments, and past back-testings have proven the effectiveness of these indicators.

Therefore, if past relationships hold, rallies in equity markets may be close to an end as widening credit spreads signal market's diminishing risk appetite. We saw this trend in 2008 as well, as the widening of credits led the declines in stock markets.

So, is Doctor's prescription too conservative and premature? Time will tell, but after a 50% rally from their lows, Equities may be due for a pause.

Asian Banks' Loan-to-Deposit Ratios

Not wanting to make a prediction on how Asian stock markets will close today, I shall use the time to share with readers some data on the Asian economies instead. From time to time, you will hear me tout bullish thoughts of Asia, but these are usually fundamental arguments which frankly, the markets ignore. These days, trading has become very technical and depend more on liquidity.

So, as we put aside the trading view and look squarely at Asia's fundamentals, one reason we can remain bullish on (Asia) is the relative strength of Asian Banks. Firstly, Asian Banks were hardly affected by the Structured Credit blow-up. Some banks did take a small hit, but nothing life-threatening. Secondly, as we look at the average Loan-to-Deposit ratios, Asian Banks in general have the capacity to lend with most Banks averaging 0.75 times. This is important, as it measures the ability of Banks to lend, if forced to. China, for example, lent heavily in the 1Q09 after the Central Government "suggested" that Banks should lend more aggressively.

Of course, a purist would argue that it is wrong that Government intervenes in such manner, but what if it was collectively good for the economy? I think the argument is less straight-forward. Still, the above chart is a reminder, that Asian Banks are strong and have the capacity to lend. But will they? Well, looking at China, they did.

A Big Chinese Cake

As Mr Zhang Yong Qun, general manager of Songjiang Plywood Factory puts it: " The domestic market is a big cake which everyone wants to have a bite of it."

Yes, as China transitions into a more domestic growth fuelled economy, the Chinese cake has gotten bigger. Unfortunately, the number of hungry mouths (companies) wanting a piece of it is ever-growing as export oriented companies turn to the "domestic cake". The scene is similar to that of Oliver Twist... "Please Sir, Can I have more?" And this is best summed up by views expressed by many at the current 20th China Harbin International Economy and Trade Fair.

While the Fair was a success, attracting 25% more booths this year, and reaching over 120,000 exhibitors and buyers from 70 countries, the mood was sombre. Many of the participants that came from the inland provinces talked about the domino effect, as the slowdown moved from the southern provinces to the northern ones. As Mr Zhang Hou (another Zhang), Chairman of the Heilongjiang Province Construction Group, said : " The impact has been delayed by 4-5 months. Business began to drop in February and orders from developed countries have been cancelled."

"Like the winds, the crisis landed first on the Yangtze and Pearl river delta, but has blown across the nation", was another metaphor used to describe the current inland sentiment.

So what is the real situation out there? Official Chinese data shows loan growth accelerating and automotive sales recovering strongly. The stellar stock market performance of the past few months is certainly suggesting the worst is behind us. For me, I think the worst is over and there are signs of green shoots in the Chinese economy. But being such a vast nation, a couple of green shoots doesn't say much, unless you are skilled enough to spot those green shoots. Hence, for most of us, it will be a bumpy 2009 even in China... and if you spotted a "green shoot", stick to it but don't try pulling them to help them grow... they'll die on you....Patience needed.

A Fresh Beginning

After a one year hiatus, I'm back...not with vigor but with apprehension. Cautious, not knowing if I can maintain this blog faithfully. Nonetheless, I shall try again. The first blogging lasted about 5 months before I got overwhelmed with work and fatigue. Not being a natural born writer, daily blogging was tough.

Still, with the encouragement of 1 reader (you see, it is so easy to please me), I commit to do better this time around. And what can you expect from the blog? The header says it all : Stocks, Credits and Me.

In the meantime, the archive has been cleared out as I did not want to be reminded of my failed attempt last year. Otherwise, happy reading and I hope everyone learns something along the way.