Archive for the News Category

Zero Hedge on the Death of Equity Hedge Funds

Created on Saturday, 10 May 2014 15:24
Written by Albert Ottoni

Zero Hedge presented a very compelling analysis on Friday showing the weaker recent performances of global hedge-fund managers.  There are some statistical biases in the data, but nevertheless, they are worth noting on an aggregate scale.

I like Tyler Durden’s opening to the data presented, “There’s “hedged” funds and then there’s this”…


Zero hedge makes a compelling case that Equity Hedge fund managers have simply become a high cost version of their index-tracking ETF brethren…


And performance advantages have dwindled…


as style tilts (growth vs value for instance) have seen increasing correlations…


It’s Still All About U.S. Housing “Reflation”

Written by Albert Ottoni

I am often dumbfounded that so-called astute economists and business media reporters still drink the U.S. Fed “guidance” cool-aid about what is still driving monetary policy decisions post crisis, as well as the jawboning ways that they in the FOMC manipulate policy perceptions under a guise of “increased transparency.”

As David Stockman recently noted, one of the most deplorable aspects of Greenspan’s and Bernanke’s monetary central planning was the lame proposition that financial bubbles somehow can’t be detected, and that “the job of central banks is to wait until they crash and then flood the market with liquidity to contain the damage.”  Turns out, the emperor really has no clothes, and financial bubbles are, in fact, all they know how to create, and keep creating them over and over again.

I love a recent quote from Stockman that, “In fact, after the giant housing bubble crashed and left millions of Main Street victims holding the bag, Greenspan evacuated the Eccles Building, and then spent nearly a whole chapter in his memoirs explaining how this devastation wasn’t his fault.”

As Stockman knows firsthand, Fed officials are data hounds, and absolutely knew with exact precision how housing prices in the US rose for 111 straight months from late 1994 to late 2006, and during that period increased by nearly 200% on average across US neighborhoods.

So forgive me for saying Janet Yellen and co, but I have one chart below that perhaps may be the only one I need to track in order to get a sense of how much longer extraordinarily loose monetary policy will be around, as well as ZIRP and negative real interest rate policy (aka, the printing press).  The chart below tells me tapering will continue slowly, but you Feds are no where near the end of your “reflation” strategy (aka bubble recreation) in terms of the likely path of short term rates in the next year or two.

For policy makers who only know financial and credit bubbles, they only need to look at the fact that 96 months after the housing peak, there are still 20 million households which are either underwater on their mortgages or do not have enough embedded equity to cover the transaction costs and down payment needed to move.

As David Stockman notes, “It is no great mystery that, historically trade-up borrowers have been the motor force that drove the US housing market. Selling their existing home for a better castle, trade-up buyers vacated the bottom-end of the market so that first time buyers could find a foothold.”  Wash, rinse, spin, repeat….

“Now thanks to Washington’s eternal conviction that debt it the magic elixir of economic growth, first time buyers are few and far between because they are buried in student debt—-about $1.1 trillion to be exact. Each graduating class has more students with loans to carry forward, and in higher and more onerous amounts. Fully 70% of the class of 2014 has student loans, and they average of about $30,000 each. Both figures are triple what they were just a decade ago.”

By Conor Dougherty at The Wall Street Journa


From WSJ .”Nearly 10 million U.S. households still remain stuck in homes worth less than their mortgage and a similar number have so little equity they can’t meet the expenses of selling a home, trends that help explain recent sluggishness in the housing recovery.

At the end of the first quarter, some 18.8% of U.S. homeowners with a mortgage—9.7 million households—were “underwater” on their mortgage, according to a report scheduled for release Tuesday by real-estate information site Zillow Inc.

While that is an improvement from 19.4% at the end of last year and a peak of 31.4% 2012, those figures understate the problem.

In addition to the homeowners who are underwater, roughly 10 million households have 20% or less equity in their homes, which makes it difficult for them to sell their homes without dipping into their savings. Most move-up homeowners typically use their home equity to cover broker fees, closing costs and a down payment for their next home. Without those funds, many homeowners can’t sell.

“It’s a sobering appreciation that negative equity is going to be with us for a while to come,” said Stan Humphries, Zillow’s chief economist. “Negative equity is central to understanding a lot of the distortions in the marketplace right now.”

Those distortions include the inventory of homes for sale, which, while rising, is low by historical standards. It also helps explain why first-time home buyers are having such a hard time cracking the market. Real estate is in some ways like a ladder, Mr. Humphries notes, so when underwater homeowners don’t trade up it makes it harder for newcomers to get in.


LenderLive: When will private-label securitization return?

The big question going around ABS Vegas

It’s the $100 billion question: When and what will it take for private-label securitization to return in a meaningful way? By my count, this question was the subject of at least four separate panels here at ABS Vegas over the past two days and countless hallway and cocktail party discussions.

Most of the panelists and attendees I encountered seemed to be optimistic that private-label issuance will grow and become more diverse in 2015. But none were willing to predict when it would hit the triple-digit level again. (In fact, one panel which had on its agenda the specific question: “When will it be a $100 billion market?” didn’t pose the question to its participants.)

Since 2010, DBRS, the rating agency, reports that there have been 71 new private-label securitizations, totaling $26.3 billion. Last year, 28 new deals—all super prime jumbos—valued at $8.8 billion came to market. This was down from $13.1 billion (31 deals) the year before. So getting back to a meaningful level of issuance, say $100 billion, seems a pretty tall order. Of course, in the heyday of private-label issuance, $100 billion was only about 10% of the total market.

During the various sessions, panelists cited a number of headwinds for the non-agency RMBS market. They included large banks’ willingness to portfolio jumbo product; continued competition from the GSEs; confusion over risk retention rules; and new concerns about eminent domain. Certainly most, if not all of them, have been inhibitors. To this list, I’d add two more hurdles that will have to be overcome.

The first is investor demand. Based on our discussions with investors, it’s still not there—yet. An argument could be made that the post-2010 deals have been issuer-driven: testing the market and demonstrating the safety of the product. But many investors still remain lukewarm about private-label securities, remembering all too clearly the loss they took on legacy RMBS.

What would change this? I think investors want to see more standardization in terms of deal structure, reps & warrants, documentation and data transparency. They are also looking for a fiduciary within the deal who would have clear responsibility to represent bondholder interests. Having said that, there is no agreement as to how to structure this role, who would assume it (a trustee or not) and how to pay for it.

Also, investors don’t want to have to read the fine print in a lengthy offering memorandum… and do it again and again. Vince Fiorillo, an investor with Doubleline Group said he didn’t want “to have to read 200 pages to understand the deal—just give me four pages.”

In my mind, the other big hurdle is a combination of motivation and economics. The big banks need a compelling reason to securitize again. They are happy with the quality and yield of the prime jumbos they’re originating. In the first three quarters of 2014, Inside Mortgage Finance estimated there was $168 billion in jumbo originations and less than 5% ended up being securitized. Securitization, they believe, comes with litigation and headline risk, not to mention high transaction cost.

So what will it take?

On yesterday’s panel of The Overview of the U.S. Housing Market, economists and bankers noted that some of the real estate challenges to securitization are resolving themselves. Negative equity is declining, shadow inventory isn’t an issue anymore and home prices in most markets are back to or near their pre-crash levels. The consensus among the panelists was that HPI would grow at a rate somewhere in the three to five percent range in 2015.

In looking ahead to the home-buying season, several panelists noted that while home affordability is high and interest rates are relatively low, credit availability remains tight. Thanks to their overrides, lenders “are originating ‘no-loss’ mortgages” that are more restrictive than GSE specs, said Scott Buchta, head of fixed income strategy at Brean Capital.

Is subprime coming back?

Barring any changes in conventional loan limits, most observers (and I include myself in this group) expect private-label securitization to grow incrementally at least for the remainder of this year and probably into 2016.

Issuers like Redwood expect to bring more prime jumbo deals to market. Also, depending upon whom you talk with, there’s a chance that the first non-QM securitization will come to market in 2015. On Tuesday, for example, Shellpoint Partners said it hoped to issue a non-QM security later this year.

According to Bloomberg News, J.P. Morgan recently estimated that as much as $5 billion of non-QM bonds could be issued in 2015.

Of course, before that can happen, the rating agencies will have to finalize their approaches to non-QM securitization, and that hasn’t happened yet.

Current thinking is that the first deals will be prime credit, but with some issue that renders them non-QM: for example, DTIs higher than 43% or interest-only features made to high FICO, high LTV borrowers.

It’s also been reported that lenders, like Macquarie, and a handful of new conduits are beginning to aggregate loans that resemble old-time subprime, now renamed non-prime. Make no mistake: this isn’t the “fog-a-mirror,” NINA-version of subprime circa 2006. There will be a very careful validation of value and ability to repay, and these loans will most likely be offered selectively to borrowers who have had financial setbacks but overcame them. Whether these products can be securitized will depend upon what the agencies will require in terms of subordination. The minimum subordination levels mentioned by the ratings agencies varies and could range from 18 to 20% and significantly higher on risker pools.

In thinking back over the last few days, it seems to me that there was more energy and optimism about focusing on the real issues that both investors and issuers are grappling with. These range from the economics of securitization to solving for the structural issues that still trouble investors about this asset class. Ultimately, how we address these issues will be the answer to the $100 billion question.