Back to Work

I trust all had a great holiday weekend. Weather here was perfect. I played tennis on both Saturday and Monday and of course I was having some issues with going up stairs as my legs were less than happy about all of the exercise. Someone should write a book titled "Things you need to know about getting old that you will not believe when you are under 25 years old". I would buy a copy!

TALF Adjustments on the Way
In the never ending quest to cover basically every slice of debt ever written, the TALF program is being tweaked to allow commercial legacy mortgage backed securities to get in on the government guarantee game. While this process is in motion, events seems to occur which would end the extension under any normal circumstances.

Zero Hedge has a round up of the S&P comments about upcoming downgrades for CMBS:

The lives of the CMSA and Chris Hoeffel are about to get a whole lot more complicated. In a report issued today by S&P, titled "U.S. CMBS Rating Methodology And Assumptions For Conduit/Fusion Pools" Standard & Poors is issuing a Request For Comments on 'its proposed changes to its methodology and assumptions for rating U.S. commercial mortgage-backed securities." Aside from the RFC, S&P goes into detail what the changes to its rating methodology will be, and the impact from these on CMBS. The latter will immediately cause many headaches for all who rode the CMBS AAA train from 1,200 bps to 600 bps, and potentially start a selling puke shortly. In S&P's own words:

Impact On Ratings
It is likely that the proposed changes, which represent a significant change to the criteria for rating high investment-grade classes, will prompt a considerable amount of downgrades in recently issued (2005-2008 vintage) CMBS. Classes up through the most senior tranches of outstanding deals (so-called "A4s," "dupers," or "super-duper seniors") are likely to be affected. Our preliminary findings indicate that approximately 25%, 60%, and 90% of the most senior tranches (by count) within the 2005, 2006, and 2007 vintages, respectively, may be downgraded. We believe these transactions are characterized by increasingly more aggressive underwriting than prior vintages. Furthermore, recent vintage CMBS, particularly those issued since 2006, were originated during a time of peak rents and values, and as such, may be more affected by the proposed rental declines discussed in this RFC. We are currently evaluating the impact of the potential criteria changes on conduit/fusion CMBS transactions from all vintages. Once we evaluate the potential impact on existing ratings, we expect to issue a follow-up publication to this RFC.
And all this just days after the government had finally drafted what it hoped was the last and final version of its TALF term sheet. Lets rewind: in the May 19th version of TALF, in order the be eligible, CMBS "must not have a rating below the highest investment-grade rating category from any TALF CMBS-Eligibile Rating Agency." Throw in a downgrade of 90% of the 2007 vintage and it's time to go back to the drawing board.

Basically, the impending downgrade would make Super Duper CMBS ineligible for TALF. And as Zero Hedge pointed out this weekend, the collapse in all (especially AAA) CMBS spreads was predicated upon the successful implementation and execution of TALF. Now, as S&P rates about 84% of the CMBS universe, the unintended consequence of a rating agency demonstrating a little character and integrity, stands to throw the entire TALF plan into a tailspin, as even with the most recent amendments, almost all Legacy CMBS issues would become ineligible.

I am suspicious of any monetary instrument that is called "Super Duper" anything, but that is another story.

The take home point is that after the coming downgrades a huge portion of CMBS will not qualify for TALF under the present criteria. As this is simply impossible, I agree with many other voices with the easy prediction that the TALF qualifications will be relaxed to include all of these instruments. This is yet another "backdoor" way to pledge taxpayer money without any debate or oversight. I wonder how long until the Treasury gets into the election game as they are fixing everything else anyway.

Revealing Headline
I came across this headline and short story today over at Clusterstock that has deeper meaning that it appears:

Bears Keep Getting Screwed Out Of Their Downturn
This was supposed to be a big week for the bears. After slowing down the bullish momentum over the last couple of weeks, it finally appeared as though they might take control of the action, once again.
You'd think that between all the talk about losing the AAA rating and the nuke tests and the housing non-recovery, the bull market (or sucker's rally or whatever you want to call it) might finally wilt. But today is proving to be just the opposite.
All of the major indices are up over 2% and the NASDAQ has gained over 3.4%.
One trader we talked to, who was convinced that this would break the back of the bull hasn't given up, calling the situation a "hanging chad."

I like this story because it really captures what is going on. I understand that bull markets are born at times that may seem completely crazy. While there have been no real structural changes in the markets, this rally just keeps going on. It seems to be becoming almost a running joke that the markets are flying higher in the face of truly terrible data. Whistling past the graveyard if you will.

Consumer Confidence Full Report
Economic Disconnect feels that one of the most useless data points available is the consumer confidence numbers. This information is nothing more than a referendum on what is on the news and what kind of speeches officials give. After two months of smoothing over a more "positive" message, amazingly more people feel better about things because they were told things are better. I guess that's something.

While all the headlines praised the confidence surge, a full read of the report had some very different information:

The Conference Board Consumer Confidence Index™ Increases Sharply
The Consumer Confidence Survey™ is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world's largest custom research company. The cutoff date for May's preliminary results was May 19th.
Consumers' overall assessment of current-day conditions improved again. Those claiming business conditions are "good" increased to 8.7 percent from 7.9 percent. However, those claiming conditions are "bad" increased to 45.3 percent from 44.9 percent. Consumers' appraisal of the job market was also more favorable. Those claiming jobs are "hard to get" decreased to 44.7 percent from 46.6 percent in April. Those saying jobs are "plentiful" edged up to 5.7 percent from 4.9 percent.

To recap:
-Consumer confidence surged from 40.8 to 54.9
-Claims that business was "good" jumped from 7.9% to an eye popping 8.7%
-Claims that business conditions were "bad" was limited to only 45% of respondents
-Claims that jobs were "hard to get" plummeted from 46.6% to a basement level of 44.7%
-Claims that jobs were "plentiful" exploded to the upside in a move from 4.9% to, this is true, 5.7%

Clearly this is a very positive report.

Rising Bond Rates Threaten Planned Debt Tsunami
After a posting lull, the Financial Ninja was back in top form today with a great post:

"There isn't enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there," -Kyle Bass

FN: Giddy talk of "green shoots" has completely drowned out a more sober and rational assessment of the global situation. Random statistical noise in various minor economic indicators have over the past two months resulted in wild exclamations of "the worst is definitely over".
It most certainly is not.
With every major economy in the world attempting to solve this economic crisis with both loose monetary and fiscal policy, it was only a matter of time before the global credit markets would reach their limits.
These limits have almost been reached.
The long end of every curve of every major economy has been steadily climbing. The rate of change has now accelerated and interest rates on these important benchmarks have now reached "pre-crisis" levels. In a ZIRP world this is definitely a bad sign. Formerly respectable governments from the US to the UK have gone the "banana republic" route and started monetizing their debts in a desperate attempt to prevent long rates from rising, to no avail. A veritable tsunami of debit issuance now sits just over the horizon, waiting to dumped on a crippled and saturated global debt market.
The UK will eventually lose it's coveted triple 'AAA' rating and the US cannot be far behind. Rising rates will drag everything from mortgage rates to credit card rates higher. Everything from residential and commercial real estate to businesses will feel the pain of higher borrowing costs. The central banks of the world have no more real options left. They've lowered the rates they control to zero and have flooded the financial system with liquidity. Their balance sheets are now swollen with toxic assets and outright debt monetization won't bring rates down.
With each interest rate tick higher another "green shoot" dies...

Plenty to think about from that post and the link above has some graphs and supporting stories.

With all the debt that needs to be sold, foreign buyers may want to think about their own "exit" strategy. Also, they may want to consider just how much is too much. I offer them this warning sign:


Have a good night.