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Five Things You Need to Know: Daily Contradiction in Terms; Daily Moment of Incredulity; Daily Inconsequential Concern; Daily Perspective Adjustment; Daily Socionomic Datapoint


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


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

1. Daily Contradiction in Terms: Subprime Junk

In just the past two weeks Moody's Investors Service cut credit ratings on more than 30 bonds that were issued in 2006 and backed by pools of subprime mortgages, according to the Wall Street Journal.

  • Here's the kicker: More than half the bonds that were downgraded to junk status were originally rated investment grade, according to the Journal.
  • As well, a few bonds with weak ratings already have seen losses, which means investors in those bonds very likely won't be repaid.
  • The recent downgrades were largely concentrated in bonds that were backed by mortgage loans known as "second liens."
  • These types of mortgages mortgages, taken out on properties that already have a first mortgage, are often used by borrowers to buy homes with little or no money down.
  • More worrisome, Moody's Investors Service is reviewing 81 additional bonds for potential downgrade, including a few with double-A and triple-A ratings, the Journal says.
  • Standard & Poor's has downgraded 43 bonds backed by subprime mortgage loans from last year and is reviewing more than 60 for downgrades.

2. Daily Moment of Incredulity: Mortgages for Illegal Immigrants

Wow, this subprime loan stuff is getting crazy... what's next? Mortgages for illegal immigrants? Hahaha! That's ridiculous! Hahaha! Wait, are you serious? Oh.

  • You know, mortgages written for people with very weak credit histories is kind of risky, but what if there were a way to multiply that risk by finding a segment of the population that not only BY DEFINITION has weak credit, but also COULD BE FORCIBLY EJECTED FROM THE COUNTRY!
  • Surely only some kind of fly-by-night lending operation would even attempt to capture the "illegal immigrant" market, right?
  • Right. Fly-by-night operations like JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC), Fifth Third Bancorp (FITB).
  • No worries! Because Deutsche Bank AG (DB) has teamed up with the Hispanic National Mortgage Association to develop a secondary market where these banks can sell and trade the loans to "hedge" their risk.
  • Timothy Sandos, president of the National Association of Hispanic Real Estate Professionals, told the Wall Street Journal the group believes at least $85 billion of mortgages could be originated from 375,000 households occupied by undocumented renters.
  • Meanwhile the sheriff in Maricopa County, whose office has arrested hundreds of illegal immigrants, said banks providing these loans are taking on a risky proposition, the Journal reported.
  • "If I catch these people, they are going back to Mexico and the banks will have a tough time collecting on their loans," said Sheriff Joseph Arpaio.

3. Daily Inconsequential Concern: Non-Financial Bank Charters

We're a paper financial asset society. Over the past 25 years we've learned to value the paper more than the stuff, the intangibles more than the real, the idea more than the physical reality. If only we could somehow entice the last remaining nonfinancial companies into the game of paper pushing... then the circle would be complete.

  • Well, friends, that day may be just around the corner.
  • What if I told you that never-ending dependence on credit expansion and paper financial assets wasn't limited to just banks, savings and loans, home builders, real estate investment trusts, insurance companies, computer manufacturers, software developers, car makers, apparel manufacturers, department stores and electronics retailers?
  • According to the Wall Street Journal, a compromise in Congress may be in the works to allow some companies outside the financial-services arena to win special banking charters.
  • While the House Financial Services Committee approved legislation yesterday that would prevent retailers and other commercial firms from owning industrial banks, the Journal says that before the voice vote, committee Chairman Rep. Barney Frank (D., Mass.) said he would consider allowing some commercial firms to own limited-purpose banking charters when negotiations begin with the Senate.
  • Industrial banks are chartered by states but must have federal deposit insurance, which means their applications are subject to approval by the Federal Deposit Insurance Corp.
  • Critics claim allowing commercial firms to own banks presents a dangerous mixture of banking and commerce, possibly putting the federal-deposit-insurance system at risk if a commercial firm fails!
  • That's a bit like driving a car off a cliff and then worrying that the brakes don't work.

4. Daily Perspective Adjustment: A Different Look at Japan's Money Supply

Yesterday we noted the 12% year-on-year decline in Japan's Monetary Base as that country attempts to emerge from deflation and edge away from their quantitative easing policy.

  • Today Minyan Philip kindly forwarded us a different view of Japanese Money Supply that we would like to share:

    "I just wanted to share a different view of the Japanese money supply data, as I track it as well. The chart below shows what I consider to be some form of intervention to keep the yen cheap. I view this as highly inflationary as opposed to the deflationary view your analysis would conclude. It may be down 12% y-o-y, but it was down 22% y-o-y not too long ago."
  • Below is the chart illustrating his point:

5. Daily Socionomic Datapoint: Walk Faster

A study of cities across the world shows pedestrians are upping their walking pace at an alarming rate as they scurry from place to place, determined to cram as much as possible into each day, according to Reuters.

  • Richard Wiseman, a professor of psychology at the University of Hertfordshire who helped conduct the research, used a 1994 study of pedestrians' speed as a comparison and found that on average city dwellers now move 10% faster.
  • The most dramatic increases were found in Asia among the fast-growing "tiger" economies.
  • Despite its reputation as "the city that never sleeps," New York ranked only eighth in the pace race, behind Dublin and Berlin.
  • "We just have this feeling that we should be producing and active all of the time," Wiseman told Reuters.
  • "But there has to be an upper limit, because if this trend continues, we will be arriving places before we have set off."
  • Somehow, we doubt that very much.
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