Big Picture Trends for 2008 From New Money and Market Article
Mike Larson takes a closer look at the crumbling markets and big picture trends for 2008. In this issue of Money and Markets, Mr. Larson examines the declining sectors of the U.S. marketplace.
Jupiter, Fla. (PRWEB) January 20, 2008 -- Mike Larson takes a closer look at the crumbling markets and big picture trends for 2008. Mr. Larson examines the declining sectors of the U.S. marketplace.
Earnings reports are hitting the newswires fast and furiously in the financial sector. Banks and brokers are spilling so much red ink that it's hard to keep up with it all. The markets are crumbling and there is no time to waste. Here are the big-picture trends for 2008.
Much of the carnage is coming from home mortgages and structured finance deals. One major culprit is the Collateralized Debt Obligations (CDOs), a form of fixed-income security that invests in slices of other packaged loans.
These caustic investments are now showing up in press release after press release:
| | - The Bank of New York Mellon (BK) wrote down its CDOs by $118 million.
- M&T Bank (MTB) announced a $127 million CDO charge.
- Merrill Lynch (MER) reported a stunning $11.5 billion in fourth-quarter charges tied to CDOs. Merrill's total quarterly loss was $9.83 billion versus a profit of $2.35 billion a year earlier.
- And Citigroup (C) won the blue ribbon, taking an eye-popping $18 billion charge. That helped drive the firm deep into the red, losing $9.83 billion in the quarter versus a profit of $5.1 billion a year earlier.
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Another crucial development is many of these firms have insured the value of their CDOs and other holdings by entering into "credit insurance" policies with certain counterparties. Think of these like any insurance policy. As a homeowner, you buy homeowners' insurance to protect yourself against the risk your house will burn down. Financial firms can also buy credit insurance; insurance that ostensibly protects their portfolios against losses if the bonds or other securities they're holding go into default.
There's just one problem: Some of the parties who sold those credit insurance policies are facing huge financial difficulties. Martin Weiss has talked about Ambac, MBIA, and others before.
Since then, the prices of their own shares and debt securities have continued to plunge. The reason: So many CDOs and other securities are going into default, or threatening to do so down the road, that investors are worried the losses will swamp the insurers. And that could spark a whole new round of write downs and charges. Indeed, Merrill Lynch took a $2.6 billion hit because one of its insurers and ACA Capital Holdings is under severe financial pressure. It wrote off its ACA-provided coverage as worthless.
Big financial firms take big market risks all the time, and sometimes they get burned. Investors are able to ignore these events. But now these companies are also seeing their bread and butter underlying loans go sour at a rapid pace.
Loans made in 2007 are performing even worse, a sign that auto lenders went too far out on the risk curve just like their mortgage lender brethren.
Make no mistake, housing remains weak and commercial real estate is slowing down. December was a particularly nasty month for the construction industry. Housing starts were off by more than 14% on the month, 38% on the year and 56% from the market peak. Permits dropped 8.1% on the month, 34.4% on the year and a whopping 52.8% from their peak.
"The decline was geographically widespread, too. Construction fell in all four regions, while permit activity fell in three out of four. Separately, an index that measures builder optimism, current sales trends, and buyer traffic remains in the dumps. At 19, the index is just off December's reading of 18, which was the lowest level since the National Association of Home Builders began its survey in 1985," Mr. Larson states.
To read this issue online, please visit:
http://www.moneyandmarkets.com/Issues.aspx?Financial-Sector-Posts-Losses-from-CDOs-and-Mortgages-3
About Mike Larson and Money and Markets
Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.
Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.
Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.
Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC.
Mr. Larson holds B.A. and B.S. degrees from Boston University.
Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.
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