The Cash Advantage (Even When Rates Are Low)

NY Times

Published: March 16, 2008

ALTHOUGH short-term interest rates have been dropping, many advisers still recommend that investors hold plenty of cash — and that they keep it in safe and simple accounts. “The biggest mistake people make is reaching for yield and putting their capital at risk,” said David Darst, the chief investment strategist of the global wealth management group of Morgan Stanley. “They should think of cash as their safe harbor.”

Over the last year, Mr. Darst has raised his recommended allocation to cash several times. Morgan Stanley now advises individual investors to hold 16 percent of their portfolios in cash, up from 5 percent a year ago.

And Mr. Darst said that cash really means cash — with nothing fancy about it. He suggests putting this money into some combination of money market mutual funds, short-term certificates of deposit or Treasury bills. Continue reading – Interest Rates Tumble

CNN Money
The bond yield tumble, and the economy
Monday March 24, 7:15 am ET
By Paul R. La Monica, editor at large

Bond yields have plunged in the past few weeks. And even if you are not an active investor, you should care about what’s been going on in the bond markets lately. Here’s why.

The yield on the benchmark U.S. 10-year Treasury currently stands at about 3.33%, down from nearly 4% about a month ago. The rate on this long-term government note is a key factor behind what happens to fixed-rate mortgages.

If rates continue to fall, they could hit not only a new low for the year – the 10-year briefly touched 3.28% in January – but could come close to falling below the 3.07% level they hit in June 2003, which was a 45-year low at the time. Continue reading

Economic Update – March 9,2008


  • Housing Foreclosures hit an all time high of 0.83% of all mortgages nationwide.

  • Over 5.8% of homeowners were behind in their mortgage payments, the largest number in more than two decades.

  • House prices lost a staggering 8.9% in 2007 – and they’re still dropping.

  • The supply of unsold houses rose to 4 million, or to over a 10 month’s supply.Homeowners’ equity fell below 50% for the first timesince 1945, hitting a new low of 47.9%. As Barry Ritholtz expressed, never before have banks and other various and sundry lenders owned more of the average American’s house than they do.

  • For February 2008 – the economy lost 63,000 jobs. That means 63,000 people lost their job in one month. Actually, the number was 101,000 people who lost their jobs in February, but the government hired 38,000 just to make the numbers look better.

  • In January 2008 – the consumer price index, the widely reported statistic used to measure inflation, rose 4.3% from January 2006.

  • According to John Williams of Shadow Government Statistics, he comes up with a reading of 11.8% inflation for the January CPI calculation. With oil at $106-a- barrel and every kind of commodity up 30% or more (aluminum, oats, silver-hit a 27 year high recently), and double-digit gains in other commodities such as, coffee, corn, wheat, zinc, etc. This just makes more sense than the economic statistics given to us by the government.

By STEPHEN S. ROACH – from Hong Kong


March 5, 2008
Op-Ed Contributor

Double Bubble Trouble

Hong Kong

AMID increasingly turbulent credit markets and ever-weaker reports on the economy, the Federal Reserve has been unusually swift and determined in its lowering of the overnight lending rate. The White House and Congress have moved quickly as well, approving rebates for families and tax breaks for businesses. And more monetary easing from the Fed could well be on the way.

The central question for the economy is this: Will this medicine work? The same question was asked repeatedly in Japan during its “lost decade” of the 1990s. Unfortunately, as was the case in Japan, the answer may be no.

If the American economy were entering a standard cyclical downturn, there would be good reason to believe that a timely countercyclical stimulus like that devised by Washington would be effective. But this is not a standard cyclical downturn. It is a post-bubble recession.

The United States is now going through its second post-bubble downturn in seven years. Continue reading

Housing In Deepest Decline Since The Great Depression

Rapid Deterioration

Housing in deepest decline since the Great Depression, economist says

CHICAGO (MarketWatch) — Housing is in its “deepest, most rapid downswing since the Great Depression,” the chief economist for the National Association of Home Builders said Tuesday, and the downward momentum on housing prices appears to be accelerating.
The NAHB’s latest forecast calls for new-home sales to drop 22% this year, bringing sales 55% under the peak reached in late 2005. Housing starts are predicted to tumble 31% in 2008, putting starts 60% off their high of three years ago.
“More and more of the country is now involved in the contraction, where six months ago it was not as widespread,” said David Seiders, the NAHB’s chief economist, on a conference call with reporters. “Housing is in a major contraction mode and will be another major, heavy weight on the economy in the first quarter.”
A home-sales measure tracked by the association that includes data on cancellations from 30 large U.S. builders that account for one-quarter of all sales shows sales down 65% from their peak in 2005, Seiders said. Government measures of home sales do not include numbers from contracts that were signed but buyers later backed out.
Vacant homes for sale in the U.S. now number about 2 million, Seiders said, an increase of 800,000 from 2005. That inventory overhang is bedeviling builders, who have been forced to cut prices and write down the value of their holdings.
Read more on the builders’ plight. “Weak demand and oversupply naturally put downward pressure on prices,” Seiders said.
Citing the Case-Shiller index, Seiders noted that home prices nationally have fallen nearly 10% from their peak in early 2006 and that prices were declining at a 19% annual rate in the fourth quarter. “The downward momentum was building at the end of the year,” he said. Read the latest Case-Shiller numbers.
Home sales may bottom out later this year, Seiders predicted, but housing starts are not likely to rebound until 2009. Housing, which took 1.25 percentage points off GDP in the fourth quarter, looks like it will continue to be a major drag on gross domestic product at least through the end of 2008, he said. End of Story

Foreclosures Hit All-Time High


Foreclosures hit all-time high

Over 900,000 borrowers are losing their homes, up 71% from a year ago, and a record number of home owners are behind on payments.

CNN Money
By Les Christie, staff writer

NEW YORK ( — More home owners than ever are losing the battle to make their monthly mortgage payments.

Over 900,000 households are in the foreclosure process, up 71% from a year ago, according to a survey by the Mortgage Bankers Association. That figure represents 2.04% of all mortgages, the highest rate in the report’s quarterly, 36-year history.

Another 381,000 households, or 0.83% of borrowers, saw the foreclosure process started during the quarter, which was also a record.

Additionally, the number of mortgage borrowers who were over 30 days late on a payment in the last three months of 2007 is at its highest rate since 1985.

“Boy, that was ugly,” said Jared Bernstein, an Economic Policy Institute economist of the data.

“It’s another reminder that anyone who thought we had hit bottom was wrong. This was a huge bubble, and when a bubble of this magnitude breaks, it creates a huge mess,” he said.” It could take a lot longer for the correction to work through the system.”

One reason it may take so long is that there seems to be no end in sight for falling home prices.

“Declining prices are clearly the driving factor behind foreclosures, but the reasons and magnitude of the declines differ from state to state,” said Doug Duncan, MBA’s Chief Economist said in a prepared statement.

The foreclosure rates for prime and subprime adjustable rate mortgages both more than doubled compared with a year ago, from 0.41% for prime ARMs to 1.06% and from 2.70% for subprime ARMs to 5.29%.

But it was subprime ARMs that contributed most heavily to the nation’s soaring foreclosure rates. Many of these loans come with low introductory rates that reset higher, often to unaffordable levels, in two or three years. Although they represent only 7% of all outstanding mortgage loans, they accounted for 42% of foreclosure starts during the quarter.

Delinquencies stood at 5.82% of outstanding mortgages, up from 5.59% during the three months ended September 30, 2007, according to the MBA. In the last quarter of 2006, the rate was 4.95%.

“In states like Ohio and Michigan, declines in the demand for homes due to job losses and out-migration have left those looking to sell their homes with fewer potential buyers, particularly with the much tighter credit restrictions borrowers now face,” said Duncan.

“In states like California, Florida, Nevada and Arizona, overbuilding of new homes created a surplus that will take some time to work through.”

California and Florida are the states hardest hit by foreclosures. They accounted for 30% of all foreclosure starts in the United States last quarter, despite representing only 21% of the mortgage market.

Florida’s foreclosure start rate more than tripled during the last three months of the year compared with a year ago, and they more than doubled in California.

Both states still have a sizable over-supply of inventory, according to Duncan, due to over-building during the speculative boom that lasted through mid-2006. That will continue to depress home prices and add to mortgage delinquencies in those states.

“We expect to see home price declines to last there through the end of 2008,” he said, “after the rest of the country is in recovery.”

As prices plummet — already some California and Florida areas have seen price drops of 25% or more, according to Duncan — defaults will soar.

And falling prices and growing foreclosures create a vicious cycle; the more prices fall the less likely it is that borrowers can use home equity to refinance into more affordable loans, which leads to more defaults. And as foreclosures rise housing inventory increases, further depressing prices.

At the same time, these trends have lead to a contraction the construction industry, hurting overall U.S. economic activity and increasing the chances that the economy will fall into recession.

CNN Money

U.S. Stocks Drop to 18-Month Low After Foreclosures Hit Record

Bloomberg News

By Michael Patterson

March 6 (Bloomberg) — U.S. stocks fell to an 18-month low, led by banks, after home foreclosures climbed to a record and loan defaults by Thornburg Mortgage Inc. and a Carlyle Group bond fund spurred concern that credit losses are deepening.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. led financial shares to the lowest level since May 2003. Retailers J.C. Penney Co. and Gap Inc. fell on sales that trailed estimates. The Standard & Poor’s 500 Index lost 10 points in the final half hour of trading as investors speculated tomorrow’s U.S. employment report will show the economy has tipped closer to recession.

The S&P 500 tumbled 29.36 points, or 2.2 percent, to 1,304.34, the lowest closing level since September 2006. The Dow Jones Industrial Average lost 214.6, or 1.8 percent, to 12,040.39. The Nasdaq Composite Index decreased 52.31, or 2.3 percent, to 2,220.5. More than 11 stocks fell for every one that rose on the New York Stock Exchange.

“It’s a tough environment,” Paul Rasplicka, who manages $4 billion at AIM Investments, said in a Bloomberg Television interview in New York. “Lending terms are tighter. The willingness to extend credit is less. It’s making it very tough for business.”

Financial stocks dropped for a sixth day, the longest losing streak since November, after an industry report showed foreclosures surged at the end of 2007 and late payments rose to the highest in 23 years. The S&P 500 slid below its lowest close of the year on Jan. 22, the day Federal Reserve policy makers slashed interest rates by the most in 23 years in response to tumbling global stocks and concern the economy was contracting.

Banks Decline

Citigroup, the biggest U.S. bank by assets, fell 98 cents to $21.17, its lowest close since November 1998. Bank of America, the second-largest, decreased $1.03 to $36.52. JPMorgan, the No. 3, lost $1.37 to $37.37.

Yield spreads on some mortgage-backed securities climbed to 22-year highs today, signaling home loans will be more expensive for borrowers. The collapse in subprime mortgages has caused at least $181 billion of writedowns and credit losses worldwide, prompting banks to restrain lending.

J.C. Penney, the third-largest U.S. department-store chain, tumbled $5.34 to $42.77. Same-store sales last month dropped 6.7 percent, worse than the average estimate for a decline of 2.4 percent, according to Retail Metrics LLC.

Gap, the largest U.S. clothing retailer, lost $1.15 to $19.37. Sales fell 6 percent, almost twice the average estimate for a 3.1 percent decrease.

Luxury Department Stores

Nordstrom Inc., a luxury department-store chain, dropped $2.34 to $35 after posting sales that trailed estimates.

The S&P 500 Retailing Index declined 4 percent to the lowest since Jan. 17 as 30 of 31 members fell. The first drop in employment in more than four years in January and higher gasoline prices are causing Americans curtail spending. Gas prices climbed today and crude oil rose to a record $105.97 a barrel as the U.S. dollar fell to its lowest ever against the euro.

The S&P 500 Consumer Discretionary Index extended its decline to 2.6 percent after Fed data showed U.S. household wealth fell in the fourth quarter for the first time in five years and borrowing slowed as home values plunged and lenders restricted credit.

The Labor Department may report tomorrow that the U.S. added 23,000 jobs in February after losing 17,000 the previous month, according to the median estimate of economists surveyed by Bloomberg News.

`More Bad News’

“People are expecting more bad news,” said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. “You’re going to have a spillover effect into unemployment. It goes from one sector to another.”

All 10 industry groups in the S&P 500 dropped, with 483 members posting declines. Financial shares were the biggest drag on the index, falling 3.7 percent as a group.

Merrill Lynch declined $3.46 to $45.86, the lowest since June 2003. The securities firm said it would sweeten the terms on $2.2 billion of convertible bonds that investors can redeem next week, giving them the prospect of a bigger ultimate payout.

Separately, Merrill and four of its Wall Street rivals had their first-quarter profit estimates cut by Keefe, Bruyette & Woods Inc. analyst Lauren Smith for the second time in less than a month. More than a dozen analysts have lowered first-quarter profit estimates for the biggest U.S. securities firms in the last two weeks on expectations of more debt-related writedowns.

18-Month Low

Goldman Sachs Group Inc. lost $6.32 to $158.65, an 18-month low. Bear Stearns Cos. retreated $5.88, or 7.8 percent, to $69.90 for the steepest decline since October 2000. Lehman Brothers Holdings Inc. fell $2.03 to $46.03. Morgan Stanley dropped $1.80 to $39.67, the lowest since October 2004.

Thornburg Mortgage lost $1.75, or 51 percent, to $1.65. JPMorgan sent a default notice after Thornburg failed to meet a $28 million margin call, Thornburg said. That triggered defaults on other financing agreements and the amounts involved are “material.” RBC Capital Markets wrote in a research note today that “bankruptcy is now a more likely outcome” for Thornburg. Shares of Thornburg, a “jumbo” home mortgage specialist, had changed hands for more than $12 last week.

Fannie Mae, the largest source of money for U.S. home loans, declined $2.57 to $21.70, the lowest since April 1995. Freddie Mac, the second-biggest, lost $1.50 to $20.14.

Washington Mutual Inc. dropped $1.04 to $11.76, the lowest since May 1996. Standard & Poor’s lowered its credit rating on the largest U.S. savings and loan and said another cut is possible.

Missed Margin Calls

Carlyle Capital Corp., Carlyle Group’s publicly traded mortgage bond fund, said it missed four of seven margin calls yesterday totaling more than $37 million. The fund, which raised $300 million in July and used loans to buy about $22 billion of AAA-rated mortgage securities issued by Fannie Mae and Freddie Mac, expects to get at least one more notice of default related to the margin calls.

Carlyle Group, started by David Rubenstein in 1987, is the world’s second-biggest private-equity firm.

UBS AG’s U.S.-traded shares dropped $1.31 to $29.52, the lowest since October 2003. Europe’s biggest bank by assets “likely” sold its 25 billion francs ($24 billion) prime Alt-A mortgage portfolio in a “fire sale,” JPMorgan said as it lifted its “credit-crisis” writedown estimate for the bank to 18.5 billion francs.

`Painful Exercise’

“Leverage is coming off across the system,” said David Baker, the Boston-based chief investment officer at North American Management, which oversees $1.1 billion. “It’s going to be a painful exercise and I don’t think the equity market has full appreciation of what it’s going to mean and how it’s going to be unwound.”

New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier, the Mortgage Bankers Association said. The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985.

The difference in yields, or spread, on the Bloomberg index for Fannie Mae’s current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 11 basis points, to 227 basis points, the highest since 1986 and 93 basis points higher than Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less. A basis point is 0.01 percentage point.

More Capital Needed?

Ambac Financial Group Inc., the bond insurer that announced plans yesterday to raise $1.5 billion by selling common shares and equity units to salvage its AAA credit rating, dropped $1.28 to $7.42. JPMorgan analysts said the shares may fall in the “near term” and the company may need more capital to avoid a downgrade.

Wal-Mart Stores Inc. gained 43 cents, or 0.9 percent, to $49.98 for the only gain in the Dow average. The world’s largest retailer said February sales increased 2.6 percent, exceeding its forecast, after price cuts spurred demand for groceries and medicines.

Fed Bank of New York President Timothy Geithner said the central bank may need to keep interest rates low for a while if financial markets remain under stress and threaten economic growth.

Traders priced in an 98 percent chance that the Fed will lower its benchmark lending rate by 0.75 percentage point to 2.25 percent by its March 18 policy meeting, up from 54 percent odds yesterday, according to Fed funds futures prices compiled by Bloomberg. The rest of the bets are for a 0.5 point reduction.

Treasuries rose and three-month bill rates fell to the lowest level since 2004 as investors took refuge in government securities.

“You don’t know when the next shoe is going to drop and where the next writedown is going to come from,” said John Buckingham, who helps oversee about $700 million as president of Al Frank Asset Management in Laguna Beach, California. “The news in the short run is likely to continue to be ugly. You have to have a strong stomach.”

Treasuries Rise on Speculation Credit-Market Losses to Deepen

Bloomberg News

March 6 (Bloomberg) — Treasuries rose and three-month bill rates fell to the lowest level since 2004 on concern that the Federal Reserve may be unable to prevent credit-market losses from deepening.

Investors sought the safety of government debt as Citigroup Inc. planned to pare its U.S. residential unit’s mortgage and home-equity holdings by about $45 billion over the next year. Bonds briefly pared gains as speculation increased that the government would have to guarantee mortgage agency securities before a Treasury spokesperson said the conjecture was untrue.

“Every day is like the 1987 stock market crash,” said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets in New York, the investment-banking arm of Canada’s biggest lender. “There isn’t a day when you’re not at the edge of your seat. The system is at daily risk.”

The yield on the two-year note fell 13 basis points, or 0.13 percentage point, to 1.50 percent at 4:32 p.m. in New York. The price of the 2 percent security due in February 2010 rose 1/4, or $2.50 per $1,000 face amount, to 100 31/32. The 10-year note’s yield decreased 10 basis points to 3.58 percent.

The three-month bill’s rate dropped 13 basis points to 1.36 percent after touching 1.31 percent, the lowest level since July 2004. The drop pushed the so-called TED spread, the difference between what banks and the government pay for three-month loans, to 1.64 percentage points, the widest amount since Dec. 27.

`Driven by Fear’

“The short end is really being driven by fear,” said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh.

The cost of exchanging fixed for floating interest-rate payments for two years climbed to a record high as investors sought to lock in rates. The spread between the rate on a two- year interest-rate swap, used to hedge against and speculate on interest-rate swings, and the Treasury two-year note yield, reached 110.06 basis points, the largest since at least November 1988, when Bloomberg began compiling data.

“This is the most illiquid market we’ve ever had, bar none, 9/11, any time in the history of the bond market,” said Thomas Roth, head of U.S. government bond trading at Dresdner Kleinwort in New York. “And it’s not getting better any time soon. We’re going to be living with this for a while.”

Merrill Lynch & Co.’s MOVE index, a measure of expectations for Treasury volatility, increased to 164.9 yesterday, the highest level since Jan. 28, two days before the central bank reduced its lending target by a half-percentage point.

`Screen Prices’

“There’s liquidity but not at the screen prices,” said Brant Carter, managing director of fixed-income retail trading for government and agency bonds in Memphis, Tennessee, at Morgan Keegan Inc. “By the time you make a quote and get an execution, the prices are, depending on the size of the transaction, a tick or a plus away to even more. That hasn’t happened in a long time.”

Ten-year securities yielded 2.07 percentage points more than two-year notes, the most in almost four years, on speculation further interest-rate cuts by the Fed will stoke inflation as commodity prices soar. Oil traded at a record of $105.97 a barrel in New York.

The difference in yield between 10-year notes and similar- maturity Treasury Inflation Protected Securities, or TIPS, climbed to 2.57 percentage points today, the most since August 2006. The difference reflects the rate of inflation traders expect for the next decade.

Negative Real Yield

The yield on two-year notes is almost 1 percentage point below the 2.5 percent annual rate of inflation excluding food and energy through January as reported by the Labor Department. The real yield for two-year Treasuries, or the difference between their interest rate and the pace of inflation, is negative 0.99 percentage point.

“This is not a value play in Treasuries,” said Richard Volpe, head of U.S. government bond trading in New York at Bear Stearns Cos., on Bloomberg Television. “This is about preservation of capital.”

Fed funds futures on the Chicago Board of Trade show a 72 percent chance the Fed will lower the 3 percent target rate for overnight lending between banks by three-quarters of a percentage point, compared with 54 percent odds yesterday. The balance of bets is for a cut of a half-percentage point.

Geithner on Stress

New York Fed President Timothy Geithner said the central bank may need to keep interest rates low for “some time” if financial markets remain under stress. The New York Fed president is a permanent voter on the rate-setting Federal Open Market Committee.

The cost of protecting corporate bonds from default rose, with credit-default swaps on the benchmark CDX North America Investment-Grade Index increasing 4 basis points to 170 basis points, according to broker Phoenix Partners Group.

Citigroup’s CitiMortgage division will decrease its total holdings mainly by making fewer loans that can’t be sold, CitiMortgage President Bill Beckmann said. Moody’s Investors Service downgraded bond insurer CIFG Guaranty four levels to A1, citing its “significant exposure to the mortgage sector.”

Bloomberg News By Daniel Kruger and Deborah Finestone