Five Things You Need to Know: 26-Year Low for Junk Defaults!; What Does FDIC Stand For?; Let's Review; Dreaming of Enron; Permanent Moon Base Really Happening!
What you need to know (and what it means)!
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. 26-Year Low for Junk Defaults!
Default rates for companies among junk-rated debt have fallen to their lowest level in 26 years, Moody's Investors Service reported.
- This morning, using data from Moody's, the Financial Times looks at default rates among speculative-grade debt issues as an indicator of global economic health.
- Last year, just 1.57% of all junk-rated debt defaulted, down from 1.8% in 2005.
- That's the lowest level since 1981, according to Moody's.
- But every silver-lined cloud has its opposite; a darker cloud lined with aluminum and stuffed with worthless paper floating around out there somewhere in whatever the opposite of Bizarro World is.
- Moody's warned it expects default rates to nearly double to 3.07% by the end of this year.
- But for every dark cloud lined with aluminum and stuffed with worthless paper floating around in whatever the opposite of Bizarro World is, there's an opposite too, even if this does present some rather bleak epistemological problems.
- Moody's noted that its warning of a near doubling in expected default rates this year is actually still positive for the overall global economy, because that rate is still well below the historic norm of 4.9%.
- But wait, there are apparently still more clouds to deal with.
- In a subversive, post-modern movement of system-wide dislocation, the FT notes that the number of companies in the lowest bracket of speculative-grade debt - those considered most likely to default - has risen to a full 20% today, compared to just 3% in 1980.
- Moreover, the number of companies in the highest category of speculative-grade debt - those seen as least likely to default - has fallen to 35%, compared to 80% in 1980.
- Every rose has its thorn.
2. What Does FDIC Stand For?
The Federal Deposit Insurance Corp. (FDIC) said bad mortgage loans increased 15.6% to $22.8 billion in the fourth quarter, according to Bloomberg.
- Loans at least 90 days past due grew by $3.1 billion, the FDIC said in its Quarterly Banking Profile released yesterday.
- That's triple the $974 million rise in the third quarter of 2006.
- Residential loans written off as bad debt more than doubled to a three-year high of $888 million.
- Let's go back to good, silver-lined cloud vs. bad, aluminum-lined cloud of woe for a moment.
- The FDIC QBP report noted that, on the positive side, "Net charge-offs in the fourth quarter were $1.7 billion (17.2%) below the level of a year earlier when credit-card losses registered a one-time spike."
- Sweet. The QBP also noted that net charge-offs of credit cards were $2.6 billion (45.7%) less than in the fourth quarter of 2005. Also sweet.
- Now for the bad news.
- Among the loan categories with increased charge-offs, residential mortgage loans had a $590-million (197.8%) increase in net charge-offs. Yes, 197.8%.
- Commercial and industrial (C&I) loans had a $156-million (12.6%) increase.
- But wait, there's more. Home equity lines of credit registered a $135-million (102.6%) increase.
- And the coup de grace (a French phrase meaning, literally, "Zoinks!"): Charge-offs of real estate construction and development loans were up by $123 million (455.4%).
- FDIC: The Freaking Data Isn't Cooperating!
3. Let's Review
According to the minutes of the Jan. 30-31 Federal Reserve Open Market Committee meeting, the consensus among the Fed heads was that home sales are showing "some tentative signs of stabilization" and the contraction in housing activity is "expected to abate this year." Admittedly, we had to look up the word "abate" because, looking at the data, we took it to mean "get worse." Incredibly, however, it turns out that "abate" means, "To reduce in amount, degree, or intensity; lessen." Weird. So let's review:
- Housing Starts Plummet 14.3 Percent In January
- Mortgage applications at lowest mark of '07, down more than 5% even as interest rates fall
- Subprime Mortgage Derivatives Extend Drop, index of credit-default swaps down 24% since January 18
- Toll Brothers (TOL) Profits Drop 67%, Company Reduces Guidance for 2007
- Pressure's on Sellers to Lower Prices, short-sales of homes increase
- Caterpillar (CAT) CEO James Owens says housing "going to get a little bit worse."
- National Association of Realtors reports that, for the first time ever, more than half the national metro areas it surveys reported deflating home prices on a year-over-year basis.
- FDIC. Freaking Data Isn't Cooperating.
4. Dreaming of Enron
In yesterday's Five Things we mentioned a New York Times article noting that in Florida the real estate problems are spreading beyond the subprime segment. Minyan GJ was struck by the comments of an optimistic real estate investor from that article, especially the following quote: "I would rather have a house that I can't sell at the moment than a stock certificate," he said. "I still have a house. It's not what an owner of Enron stock can say."
- Kevin -
I laughed when I read the comment by Mr. Matera about Enron stock. If the article is right he put down $12,000.00 for four houses. But now he is on the hook for some $800,000 to $1,200,000 (seems they were each $300,000 homes so I am guessing at his mortgage amount) in mortgages on two houses that don't cover the nut and two unfinished houses with liens. I would much rather lose my $12k straight out than be on the hook for $1.2 million more and have the loss go up each and every day. It is a short that just does not stop giving pain!!!!
The two unfinished houses are going to cost him plenty to finish. First he has to pay off the liens and that is going to take a lawyer and all sorts of time. Bring your checkbook!!! I figure it will be much more than his $12,000 initial investment. He is going to get zero from the developer. Since a good bit of the work will probably have to be redone (drywall has mold for sure being in Florida) it is going to cost even more to get those houses finished than he is expecting. Do you think a contractor that is not being paid is doing a good job? Maybe being a former contractor he can do a lot of the work himself and save some bucks. But even so if they are finished, he is still going to have to make up the difference each and every month for a long, long time.
And there are lots of other homes like his. 482 or so it seems. Some are just going to cut their loss at $12k and the house will go to auction and lower the value of what he has left even more.
My prediction: In three years, he will be wishing he had lost $12k on Enron stock.
It sounds incredible, but apparently the plans for a permanent space station on the moon are really happening! Is it just us, or shouldn't we, like, maybe clean up around here first before shuffling off to the moon? Also, there's a war going on. If we use what science fiction calls "warp drive" technology, then the trip would be instantaneous. Another possibility is traveling just below the speed of light, which would take about six years.
5. Permanent Moon Base Really Happening!
FAQ 1 of 6:
How long will it take you to send the medical supplies and food we requested in our earlier distress signals just before the global nuclear disaster destroyed our ability to communicate?
This is a great question. If we use chemical fueled rockets, like in the Apollo mission to the moon, it would take us approximately 50,000 years to travel back to Earth from the nearest star.
Because "warp drive" technology is so expensive, we'll probably just play it by ear and opt for something middle of the road; something in between a chemical fueled rocket to just below light speed.
So figure anywhere from 10 years to 25,000 years.
Warp drive. (Photo illustration)
FAQ 2 of 6:
How many of you will be coming back to help us?
Yes. Well, that's a bit tricky. See, we won't actually be returning ourselves, not physically anyway. Haha. The nuclear radiation exposure would kill us! For dangerous missions such as this we'll be sending cargo ships manned by androids with special hologram projection instructional messages from us, kind of like in the first Star Wars movie when Luke accidentally discovered Princess Leia's hologram "help" message in the R2D2 robot. Only our message will not be a "help" message, but will instead feature detailed instructions on how you should help the androids load the cargo ships with the materials we need from you.
Android hologram message. (Re-enactment)
FAQ 3 of 6:
How will you know how many ships to send so you can transport everyone off Earth?
Uh, right. Yes. Good question.
I think what we need to focus on here, however, are the details of how to separate and organize the piles of salvage materials. We'll need you to prioritize things by their platinum and silver content, of course. Also, I think you will really, really like the androids. They are very friendly and have a pleasant, human-like demeanor as long as you obey their commands.
Sample android. (Image not to scale.)
FAQ 4 of 6:
What will we be able to bring with us on the evacuation ships?
Another good question.
It is important not to mistake the friendly, human-like demeanor of the androids for weakness. Also, while they may appear to lack mobility, they actually have the ability to fly and shoot lasers out of their eyes which, we want to emphasize, although they look exactly like eyes, are not really eyes, but laser guns.
Note lasers shooting out of the androids eyes. (Not a re-enactment.)
FAQ 5 of 6:
How long will the boarding process take, and will the trip affect us physically?
You do understand that the androids have laser guns for eyes, don't you? Because we want to be really, really clear on this. You know the androids' eyes? They aren't really eyes. They are laser guns. Also, the laser guns really do work. We have tested them.
Look closer at how the android's eyes are shooting lasers out of them. (Again, not a re-enactment. We are totally serious about this.)
FAQ 6 of 6:
Will we be able to sleep on the spaceship trip when we leave Earth?
Hmm, let's try a different approach. You know how laser guns can emit a burst of energy that completely evaporates the particles of any substance that can be found anywhere on the planet Earth? Ok, imagine those laser guns are coming out of an android's eyes! Also, imagine that the androids can read minds, and that the lasers will automatically shoot out of their eyes when a human considers in his or her mind, even very briefly, disobeying them. Because we programmed them to do that.
Here's looking at you, kid.
It sounds incredible, but apparently the plans for a permanent space station on the moon are really happening! Is it just us, or shouldn't we, like, maybe clean up around here first before shuffling off to the moon? Also, there's a war going on.
If we use what science fiction calls "warp drive" technology, then the trip would be instantaneous. Another possibility is traveling just below the speed of light, which would take about six years.
"I'll put in a good word for you when I get back to Houston, but transfers take time."
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