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Five Things You Need to Know: The Downside of Logic, Speaking of Mortgages, Speaking of (de)Stabilization, Yet Another Study to Study, Oh Charlize No!

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What you need to know (and what it means)!

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Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. The Downside of Logic

HSBC Holdings Plc, Europe's biggest bank, said it's setting aside 20% more than analysts estimated for loan losses in 2006 because the company's U.S. mortgage business is deteriorating, according to Bloomberg.

  • In a surprise announcement yesterday afternoon, HSBC said its subprime-mortgage problems are worse than thought, and deteriorating more rapidly than almost anyone in the industry anticipated.
  • Yesterday afternoon, in an emailed statement, HSBC said home loans to risky borrowers in the U.S. (subprime loans) are going bad faster than the bank expected just two months ago.
  • Meanwhile, New Century Financial, HSBC's largest competitor for sub- prime mortgages, said it may report a loss for last quarter and restate other 2006 earnings after not setting aside enough for repurchases of loans.
  • New Century also indicated a potential fourth quarter loss was in part related to an increase in defaults on new loans.
  • Home loans to borrowers with poor credit ratings or large debt burdens are defaulting at a faster rate than during the U.S. recession six years ago, according to calculations by Friedman Billings Ramsay Group, Bloomberg said... and we aren't even currently in a recession.
  • The reason these two stories are important is because virtually every thesis - from the Fed's Goldilocks view on inflation and economic growth and consumer spending - to the bullish view on bonds - to both the coexisting bullish and bearish outlooks for U.S. equities - hinges on whether housing has indeed stabilized.
  • The logic of the situation - borrowers in the subprime category stressed, loans deteriorating far more rapidly than anyone expects while the economy supposedly chugs along with increases in productivity and barely perceptible wage growth accompanied by is stretched thin.


2. Speaking of Mortgages

The Wall Street Journal this morning notes that with rates on many homeowners' adjustable-rate mortgages rising, some who would like to refinance into a new loan are finding they can't.

  • According to the Journal, the problem is in some cases related to prepayment penalties, which would force homeowners to come up with thousands of additional dollars if they refinance in the first few years of the loan.
  • The penalties are actually quite common with adjustable-rate mortgages that carry low "teaser rates" that often step up sharply after an introductory period; it's a bit like 0% interest credit card teaser rates that jump up after a six-month or one-year period.
  • Of course, the issue for other borrowers is the housing market itself.
  • The combination of flat (or declining) prices and tighter lending standards has caught many homeowners off guard.
  • Meanwhile, there are about $1.1 trillion to $1.5 trillion in ARMs that will face rate increases this year, according to the Mortgage Bankers Association.
  • But wait, there's more. You don't think homeowners are just going to sit back and take things lying down, do you?
  • The Washington Post reported on Tuesday that a Federal judge is allowing a class-action suit involving up to 7,000 borrowers against Bethesda-based Chevy Chase Bank related to adjustable-rate mortgages.


3. Speaking of (de)Stabilization

Toll Brothers (TOL) this morning said they saw orders plunge 33% in its fiscal first quarter and expects to take larger than expected write-downs when it posts quarterly results later this month.

  • Toll said net orders totaled 1,027 units in the quarter-ending Jan. 31, down 33% from 1,544 units a year ago.
  • Most of the decline was due to cancellation.
  • But what about stability? Aren't things stabilizing?
  • Here's your stability: The number of cancellations, while still "well above the historical average of 7%" (yes, 7%) has begun to decline.
  • That's it?
  • That's it. That's your housing market stability.
  • Listen to the sounds of "stability" yourself when the company broadcasts live on its website, www.tollbrothers.com, a conference call at 2 p.m. EST to to discuss the preliminary results.


4. Yet Another Study to Study

A study released in January by the New York Fed finds that bidding category data released by the Treasury Department provides a pretty good early snapshot of foreign demand for U.S. Treasuries.

  • In recent years, the U.S. Treasury Department has expanded the information it routinely releases about purchases of its securities at auction.
  • Treasury now releases information about bidders by category and purchases by investor class for a broader group of securities than in the past.
  • The Fed study, "Who Buys Treasury Securities at Auction?", finds that the bidder category data, which is released first, offers an early read on demand, especially for Treasury notes.
  • This is important information for those who are concerned about the $1.3 trillion of Treasury securities held in foreign official accounts.
  • The study finds that purchases by indirect bidders, in particular, are a fairly good proxy for foreign purchases of Treasury notes, though not Treasury bills.
  • At the very least, it's another stream of data to keep us all busy.


5. Oh Charlize No!

A Swiss watchmaker is suing Hollywood actress Charlize Theron for allegedly breaking an endorsement deal to wear only its timepieces, the Telegraph reported.

  • Oscar-winning actress Charlize Theron is being sued by Swiss watchmaker Raymond Weil for breach of contract after the 31-year- old was allegedly caught wearing a competitor's watch in public.
  • Now, surely you're thinking, so what? So, some actress slips on the wrong watch and loses her endorsement deal. Why should I care?
  • Because the contract she violated was a $20 MILLION DOLLAR ENDORSEMENT DEAL!
  • That's right. $20 million.
  • "Let us get this straight. Theron was getting paid $20 million to wear Raymond Weil watches? For how long? Forever?"
  • Well, for $20 million you might think forever, but it was for one year. ONE FRICKIN' YEAR! But that's not all! Not by a long shot! She apparently didn't even make it THREE MONTHS before breaking the contract!
  • How could this happen?


How Charlize Theron Lost Her $20 Million Endorsement Deal

March 14, 2006

Int. Charlize Theron's dressing room.

Charlize is putting on makeup, finishing up preparing for a product endorsement event as Kevin enters the room.

Hey Charlize, what's up?

Hi Kevin. Just getting ready for this stupid endorsement event. Hate these things!

Well, you look great.

Thanks! You're sweet. Can you do me a favor and hand me that watch over there?

This one?

(Clearly disappointed) No, the Raymond Weil one next to it.

What!? You can't mean this one?

(Putting on the watch.) I know, but I have to.

Haha. Get out! It looks like you're wearing handcuffs!

Does it? It is that bad?

Charlize, that things huge! It's like you stole Big Ben and hired a blacksmith to meld it onto your wrist!

Is it too heavy for this dress?

Too heavy? Too heavy? What, are you Flavor Flav? That thing's like a cross between a grandfather clock and a pro wrestling championship belt. Wear the red one. It's Dior.

(Whispering) But they're paying me a lot of money to wear this one.

Look, whatever they're paying you - it's not enough to walk around like you just escaped from a chain gang. Trust me. You're an Oscar winner. You have an image to maintain. Give it to me. (Kevin takes back the watch.)

Kevin, you don't understand, they're paying me, like, a lot of money to wear that watch.

(Throws watch out the window.) There. Now, put this one on. It looks great with your dress. Red and black. Classy!

(Reluctantly, Charlize puts on the Dior watch. Once on, she admires the watch.) You know, you're right! I'll just say I lost the Weil watch. What's the worst thing that can happen!

Yeah! I mean, it's not like they're paying you millions of dollars to wear a stupid watch. Haha. That would be ridiculous! I'll endorse their watches for free.

Thank you, Kevin. You're so funny and sweet! Thank you again, Kevin. I feel so much better about my outfit now. How do I look?

You look great. But be sure you hold your hand up during the photos so they can get the watch. Red and black. Classy!

Oh, I'm late! I gotta go! Bye!

Take care, Charlize. (Charlize waves and runs out of the room. Kevin calls after her.) Be sure and show off that watch!

No positions in stocks mentioned.

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