Investing Curiouscatblog

Category: Financial Literacy

  • Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities

    I make a point of showing the discount rate changes by the Fed don’t translate to mortgage rate changes. I do so because many people think the discount rate does directly effect mortgage rates. But the Fed announced today, actions that actually do impact mortgage rates.

    Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities

    The central bank will increase its purchases of mortgage-backed securities by $750 billion, on top of a previously announced $500 billion. It also will double its purchases of debt in Fannie Mae and Freddie Mac to $200 billion. Those steps are intended to lower mortgage rates. The announcement of the previous purchases pushed mortgage rates down a full percentage point.

    If you are looking at refinancing your mortgage now (or soon) might be a good time, rates were already very low and will be declining. And if you own long term bonds you just got a nice increase in your value (bond prices move up when interest rates move down).

    Related: Lowest 30 Year Fixed Mortgage Rates in 37 Years – Low Mortgage Rates Not Available to Everyone – Why do we Have a Federal Reserve Board?

  • Coca-Cola Chooses Bond Financing Over Commercial Paper

    In normal markets commercial paper is very safe. The very short term business borrowing is made possible by money market funds and provides businesses with short term financing at low rates and provides investors some return for short term cash holdings. But the recent credit crisis does not a normal market make. Companies that depended on the commercial paper market now are thinking about the risks of such dependence.

    Coca-Cola Flees Commercial Paper for Safety in Bonds

    Coca-Cola, health-insurer WellPoint Inc. and more than 30 other companies are issuing bonds and using the proceeds to repay their short-term IOUs, according to data compiled by Bloomberg. The amount of commercial paper outstanding shrank 16 percent since Jan. 7 to $1.48 trillion last week and daily issuance dropped to a four-year low, according to the Federal Reserve.
    …
    By lessening their reliance on commercial paper, borrowers are paying higher interest rates to avoid the risk of not being able to roll over the debt every few weeks. With the gap between short- and long-term debt rates the widest in at least two decades, the cost of swapping $1 billion of 30-day paper with long-term debt can cost more than $75 million in additional annual interest

    Related: Where to Keep Your Emergency Funds?

  • China A-Share Premium

    World-Beating China Rally Doomed by PetroChina’s Hong Kong Gap

    Shares in the yuan-denominated CSI 300 Index traded at 16.2 times earnings this month, compared with 8.6 times for 43 mainland companies in Hong Kong. PetroChina Co., the country’s biggest company, fetches twice the valuation in China as in Hong Kong.
    …
    Restrictions on foreign and local investment that prevent arbitrage with H shares helped make mainland equities more expensive.

    It is pretty odd that there is such a large premium that local Chinese investors must pay to own stocks in the same companies available to foreign investors. There has been a discount on the Hong Kong shares (H-shares), of maybe 20-30%, for years. But it seems that either the H-shares are cheap or the Chinese shares are too expensive (or maybe a little of both). I am positive on the outlook for China both in the short and long term. Though investments there do have substantial risks (as they do anywhere). I would imagine this premium for Chinese (A-shares) should also largely disappear over the next decade as the market is allowed to become one (and at least allow arbitrage between to the two markets to reduce the premium).

    Related: Capitalism in China – Easiest Countries for Doing Business 2008 – China and USA Exports and Imports Drop Sharply

  • The USA Economy Needs to Reduce Personal and Government Debt

    The economy has structural problems. The solution at this time is not to convince people that everything is fine and just go spend money you don’t have. Personal debt is much to high. The practices that allowed huge anti-competitive and economy endangering institutions to threaten the economy have not been addressed. Hundreds of billions of dollars have been given to those who caused the credit crisis. Making the federal debt problem even worse.

    Some suggest we need to regain consumer confidence. Unfortunately that fixes nothing. That “strategy” is just to convince people problems don’t exist and buying what you can’t afford is fine. Just convince people to go spend more money, run up their credit card debt, borrow against their house, as long as everyone believes it can continue. That can work for awhile but it then fails due to structural issues. And the solution becomes more and more difficult the longer such a strategy is used. The same way a ponzi scheme eventually implodes.

    If you could convince those in a ponzi scheme (and new investors) that they should just be optimistic it can continue. But eventually people ask for their money to buy something and none exists and the scheme fails.

    With an economy, after structural problems are addressed then you need to convince people to be less fearful and to be more optimistic. Because often by that time people have become so fearful that they are not taking even reasonable steps. They don’t buy even though they have the money in the bank and have a real need for the purchase. When this happens, convincing people that the economy is stable is important. However, cheerleading and convincing people to just continue to run up their debts to spend more is not wise when the economy is already far to in debt is not wise (though it is politically expedient).

    The USA needs to stop living beyond its means. That is the most important factor to long term economic strength. But the focus doesn’t seem to be on doing this, instead it seems to be on printing money to paper over the problems. There are many great strengths of the economy and those have allowed huge federal deficits, huge personal debt, monopolistic practices, destabilizing financial risks taking… Even with that things have been quite good. But those areas need to be addressed over the long term.

    Related: Let the Good Times Roll (using Credit) – Families Shouldn’t Finance Everyday Purchases on Credit – Living on Less

  • Making Money Buying Distressed Mortgages

    Ex-Leaders at Countrywide Start Firm to Buy Bad Loans

    PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.

    Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.

    Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.
    …
    Phone operators for PennyMac — working in shifts — spend 15 hours a day trying to reach borrowers whose loans the company now controls. In dozens of cases, after it has control of loans, it moves to initiate foreclosure proceedings, or to urge the owners to sell the house if they do not respond to calls, are not willing to start paying or cannot afford the house. In many other cases, operators offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.
    …
    But a PennyMac representative instead offered to cut the interest rate on their $590,000 loan to 3 percent, from 7.25 percent, cutting their monthly payments nearly in half, Ms. Laverde said.

    This is one way the economy cleans up messes. A foolish organization lends money (or buys mortgages, loans…) to lots of people that couldn’t pay back and they then sell those loans at a big discounts. The new owners of the loans now have this mortgage that the homeowner can’t afford. But the cost of the mortgage to them wasn’t anywhere near the amount the homeowner owes. So the new buyer can make a great deal of money just by getting the homeowner to start paying again (even if it is at a much lower rate). They can also make money by foreclosing and then selling the property but truthfully if they can get the homeowner to pay that is likely a much better quick profit for them (and they can then sell the performing loan to someone else – I would imagine). Who knows if PennyMac will make a ton of money this way, but I fully expect many organizations to do so.

    Related: Nearly 10% of Mortgages Delinquent or in Foreclosure – Learning About Mortgages – How Much Further Will Housing Prices Fall? – Jumbo v. Regular Fixed Mortgage Rates: by Credit Score

  • House of Cards – Mortgage Crisis Documentary

    A documentary of the mortgage crisis by CNBC: House of Cards. It is a bit slow and simple but still for people that don’t really understand the basics of what happened it is interesting.

    Related: Nearly 10% of Mortgages Delinquent or in Foreclosure – Ignorance of Many Mortgage Holders (2007) – How Not to Convert Equity – mortgage terms

  • I Wouldn’t Sell Oil at These Prices

    Oil has fallen to $40 a barrel from nearly $140 less than a year ago. Now that $140 level was the result of a huge spike in the price. But if I owned a bunch of oil (as a country or a company) I sure wouldn’t want to sell it at $40. I would much rather just keep it in the ground and sell it later.

    OPEC has reduced quotas in an attempt to react to the global recession. But it strikes me as bad management to sell your resources at these low levels. Now you might have to sell some to service debt and meet fixed expenses. But continuing to sell at these levels instead of just keeping it in the ground and waiting a year or two (or longer) just seems like a very shortsighted action.

    Now you would have great difficulty acting on my opinion if you don’t plan ahead. To do so you would need to bank profit when you are selling at high prices so you can ride out low prices without being forced to sell to meet your obligations. And it seems many countries are unable to do that. And my guess is many oil company contracts require production based on what the country wants done.

    It just doesn’t seem to me that the I would do much better waiting to sell my oil than sell it at these prices.

    Related: Forecasting Oil Prices – Oil Consumption by Country – South Korea To Invest $22 Billion in Overseas Energy Projects – Curious Cat Science and Engineering Blog posts on energy

  • Low Mortgage Rates But High Eligibility Requirements

    Low Mortgage Rates a Mirage as Fees Climb, Eligibility Tightens

    The average rate on a 30-year fixed mortgage dropped to 5.07 percent for the week ending Feb. 26 from 6.63 percent for the one ending July 24
    …
    “A score of 700 was once near perfect,” said Gwen Muse Evans, vice president of credit policy at Fannie Mae, the government-controlled company that helps set lending standards. “Today, a 700 performs more like a 660 did. We have updated our policy to take into account the drift in credit scores.”

    Consumer credit scores, called FICOs after creator Fair Isaac Corp., range from 300 to 850. The average FICO score on mortgages bought by Freddie Mac and Fannie Mae rose to 747.5 in the fourth quarter of last year from 722.3 in 2005, according to Inside Mortgage Finance.

    Accunet’s Wickert said that a 660 FICO score would have qualified most borrowers for loans with no upfront fees in the past. Now, someone trying to borrow $200,000 with a 660 score would have to pay a 2.8 percent fee, or $5,600, he said. Even someone with a 719 score would have to pay $1,750 in cash.

    The low mortgage rates are attractive but a decision to re-finance (or buy) must consider the long term implications. Also if you are re-financing to take advantage of the low rates consider a 20 year or 15 year loan if you are already well into your 30 year loan. A fixed rate loan is the most sensible option at this time.

    Related: Low Mortgage Rates Not Available to Everyone – 30 Year Fixed Mortgage Rates and the Fed Funds Rate Chart – Ignorance of Many Mortgage Holders – Fed Plans To Curb Mortgage Excesses – How Not to Convert Home Equity

  • More Companies Cutting Dividends Than Any Year Since Before 1954

    Dividends Falling Means S&P 500 Is Still Expensive

    U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data.

    A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.

    Just last November the S&P 500 dividend yield topped the bond yield for the first time since 1958. Yields often rise as stock prices fall on future prospects and companies announce dividend cuts after stocks have already fallen (due to the deteriorating conditions the company faces). So you always must be careful not to count dividends before they are paid. As an investor you need to look into the future and see how secure the dividends are likely to be.

    Related: 10 Stocks for Income Investors – 10 Stocks for 10 Years – Curious Cat Investing Books

  • What the Bailout and Stimulus Are and Are Not

    The huge banking bailouts and stimulus bill are meant to counter-balance the huge problems the economy is suffering through. The damage caused to the economy, is largely from unwise risks that were allowed by regulators and politicians that have not panned out and are now greatly damaging the economy. It is always easy for politicians to pay out money in an attempt to buy our way out of problems. That is what the stimulus and bailout bills are doing. They are yet again heaping huge debts on our children and grandchildren.

    The bailout and stimulus packages are not about preventing foolish risks to the economy by huge banks that would make the economy safer in the future. Those types of bills are very hard to pass as the politicians get great sums of money to allow people to risk the economy for their own benefit. The concept of the stimulus is not to fix the cause of the problem but do cope with the problem we are left with due to people that paid themselves huge amounts of money. Now the taxpayers get to fund the huge payouts wall street has given themselves.

    This is because they never actually provided the value they claimed. They merely created false returns to claim they provided a benefit to justify obscene pay (many of them truly didn’t understand this is what they were doing so beyond failing they were so incompetent [while accepting well over a million dollars a year] they didn’t even understand that the financial games they were playing were failing. It is hard to know what is worse, being so incompetent while claiming you deserve millions or knowing you are just paying yourself money based on false claims of value.

    Either way, the banks are left bankrupt – having worthless securities created by those paying themselves huge amounts of money. If the huge banks fail the financial system collapse creates huge problems – businesses that have operated for decades by borrowing some funds (responsibly) go bankrupt because no funds are available to lend them, etc..

    The stimulus is not about fixing the problems of the past it is about countering the huge decline from the bubble economy. That bubble economy was funded largely by claiming value where none existed thereby allowing people to spend huge amounts of money based on those faulty claims. How people are shocked that playing financial games doesn’t actually make hundreds of billions of dollars appear out of thin air is beyond me.
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