Tag: news

The mind-numbing Case-Shiller regional charts below are presented without too much comment. As MHanson.com's Mark Hanson adds, the visual says it all.

Bottom line:

Q:  If 2006/07 was the peak of the largest housing bubble in history with affordability never better vis a’ vis exotic loans; easy availability of credit; unemployment in the 4%’s; the total workforce at record highs; and growing wages, then what do you call “now” with house prices at or above 2006 levels; worse affordability; tighter credit; higher unemployment; a weakening total workforce; and shrinking wages?

 

A:  Whatever you call it, it’s a greater thing than the Bubble 1.0 peak.

1)  Funny (and Demented) Seattle area Realtor anecdote regarding the potential for another housing Bubble: “House prices can’t be in a bubble because they are only 10% greater than the 2006 peak, meaning growth of only 1% per year since 2006. And 1% per year is not the Bubble type gains we saw back in the mid-2000’s”.

DOH! How do you argue with that? You don’t, you just turn the other cheek and pound a drink.

2)  Case-Shiller’s most Bubblicious Regions

Bottom line: If these key housing markets hit a wall they will take the rest of the nation with them; bubbles and busts don’t happen in “isolation”.

Not shown in these charts of absolute index levels is the three-straight months of national yy price gain deceleration. Moreover, the CS captures prices up to 7-months old at the tail so conditions are already a lot different than shown here.

 

3) Notes & Observations on above chart:

• The bubblicious regions above all have one thing in common…STEM. As such, if the tech and biotech sectors hit a wall, which some believe has already begun, so will these housing regions.

• If these key housing markets hit a wall they will take the rest of the nation with them; Bubbles and busts don’t happen in “isolation”.

• House prices have retaken Bubble 1.0 levels on the exact same drivers: easy/cheap/deep credit & liquidity that found its way to real estate. The only difference between both era’s is which cohorts controlled the credit and liquidity. In Bubble 1.0, end-users were in control. In this bubble, “professional”/private investors and foreigners are. But, they both drove demand and prices in the exact same manner. That is, as incremental buyers with easy/cheap/deep credit & liquidity, able to hit whatever the ask price was, and consequently — due to the US comparable sales appraisal process — pushed all house prices to levels far beyond what typical end-user, shelter-buyers can afford. Thus, the persistent, anemic demand.

• Bubble 2.0 has occurred without a corresponding demand surge just like peak Bubble 1.0. As such, it means something other than fundamental, end-user demand and economics is driving prices this time too.

• The end result of Bubble 2.0 will be the same as 1.0; a demand “mix-shift” and price “reset” back towards end-user fundamentals once the speculators finish up, or events force them to the “sidelines”.

• Lower prices will create demand, which the housing sector will always achieve one way or another…it’s what it does. Just like the anemic demand led the price crash of Bubble 1.0, which ultimately led to increased demand as prices stabilized lower.

• The Bubble 2.0 pop will also free up supply in the same manner as Bubble 1.0, just not as much from foreclosures. However, I do think people underestimate the volume of low-down mortgages originated over the past several years, and those with little to no equity in legacy loans or rising interest rate mods, which if house prices drop a few percent turn high-risk, especially when factoring in the 6%+ cost to sell. But, it doesn’t matter where the supply comes from — maybe the PE firms start to dump rentals — as it’s fungible.

• Sure the bubble could blow bigger. Maybe we get a double-bubble. Bubbles are strange things. But, when they begin to fall there is a lot of air under there because the downside has clearly been established.

• Lastly, I am betting 2016 marks the high for house prices, as mortgage rates can’t go meaningfully lower, the unorthodox demand cohort is exhausted, and real affordability to end-user shelter-buyers has rarely been worse. In fact, I believe this is the year house prices go red yy.

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The first picture of the man behind the Nice terrorist attack, Mohamed Lahouaiej Bouhlel, has been published.

The image, which was taken from French TV reports that said the picture had come from the French government and specifically his passport, shows the face of the man responsible for the cowardly attack that left at least 84 people dead and some 200 injured.

The documents appear to be those that were (convenietly) found alongside other papers in the truck that Lahouaiej Bouhlel used to carry out the attack. The vehicle had been hired from a location outside of Nice, and it may have been picked up on Wednesday, reports said.

More details have emerged about Bouhlel, described by his neighbors as a handsome but frightening man, who according to Reuters was convicted only once before: for road rage.

While a history of threats, violence and theft had brought him to the attention of police, Bouhlel, a 31-year-old Nice resident born in Tunisia, was not French intelligence services’ list of suspected militants. He was convicted for the first time in March this year, for road rage, French Justice Minister Jean-Jacques Urvoas said.

“There was an altercation between him and another driver and he hurled a wooden pallet at the man,” Urvoas told reporters. As it was his first conviction, Bouhlel was given a six-month suspended sentence and had to contact police once a week, which he did, Urvoas added.

He had three children but lived separately from his wife who was taken into police custody on Friday, prosecutor Francois Molins said.

A former neighbor in Bouhlel’s hometown of Msaken, about 120 km (75 miles) south of Tunis, told Reuters he had left for France in 2005, after getting married, and had worked as a driver there.

Tunisian security sources told Reuters Bouhlel had last visited Msaken four years ago. They also said they were not aware of Bouhlel holding radical or Islamist views, saying he had a French residence permit for the past 10 years without obtaining French nationality.

Neighbours in the residential neighborhood in northern Nice where Bouhlel lived said he had a tense personality and did not mingle with others. “I would say he was someone who was pleasing to women,” said neighbour Hanan, standing in the lobby of the apartment building where Bouhlel lived.

“But he was frightening. He didn’t have a frightening face, but … a look. He would stare at the children a lot,” he added.

His home town Msaken is about 10 km (six miles) outside the coastal city of Sousse, where a gunman killed 38 people, mostly British holidaymakers, on a beach a year ago. Many residents of Msaken have migrated to Nice, where there is a large Tunisian community.

Relatives and neighbours in Msaken said Bouhlel was sporty and had shown no sign of being radicalised, including when he last returned for the wedding of a sister four years ago. A nephew of Bouhlel, Ibrahim, said his uncle had called three days ago saying he was preparing a trip back for a family party. Bouhlel’s brother, Jabeur, said he still doubted whether his sibling was the attacker.

“Why would my brother do something like this?” he told Reuters, adding: “We’ve been calling him since yesterday evening but he’s not responding.”

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The new head of UniCredit, Italy’s biggest bank, has implored the EU to take a more lenient stance on rescuing the country’s troubled banking sector, as The FT reports Mustier urges Brussels should look to a controversial 2004 French government rescue of Alstom as a model.

Jean-Pierre Mustier, a former senior banker at Paris-based Société Générale, said Alstom — the French engineering group bailed out by a controversial €2.5bn government aid package — was an example where “the state intervened . . . and the company thrived afterwards.”

 

European authorities have balked at any taxpayer rescue of Italian banks that do not adhere to strict new EU rules that limit Rome’s ability to bail out financial institutions without first forcing losses on private creditors.

The 13% surge in Italian bank stocks this week – the most since 2011…

…offers a further hint that, as Bloomberg's Mark Cudmore explains, there’s only one viable outcome to the fiasco with Italian banks, and it will ultimately be a positive catalyst for global risk assets even if negative for the euro.

It may seem like there are many different ways this critical situation can pan out, but all bar one would be fatal for the euro zone. The only option is to bail out the banks without “bailing in” investors.

 

Of course the banks will be rescued. This column has previously outlined how Italian banks will be saved precisely because the alternative is the collapse of the Italian economy, which would likely precipitate the breakup of the euro.

 

So the crunch decision is whether bond investors share some of the cost of that bailout. Since January, the EU has legislated that investors must be bailed in, and bail-ins have happened elsewhere, e.g. 54% haircut for senior creditors of Heta Asset Resolution in Austria.

 

Surely the EU can’t blatantly break its own new rules just for Italy? That would set a bad precedent, completely undermine its authority, create large moral hazard within the euro zone, and weaken the euro.

 

But it can. And it most likely will. Because the alternative is much scarier. In Italy, too much of the subordinated bank debt is owned by private individuals. If they’re made to pay for this, then Italy’s constitutional referendum in October will fail, resulting in Prime Minister Renzi resigning and the collapse of the government.

 

Italy will be in crisis, and anti-EU sentiment will gain a significant boost at a time when the euroskeptic Five-Star Movement has already become the most popular party. Again, the euro zone will be in serious jeopardy.

 

So there’s really only one path to be followed: the one that doesn’t threaten to break up the euro zone. The Italian banks will be bailed out and investors will not be bailed in.

 

This will be a boost to global equities and positive- yielding bonds, yet another boon for emerging markets. It will be less good for the euro, which is trading within 1% of its 18-month high versus a trade-weighted index.

"Whetever it takes" …"when it's important you have to lie" … and "rules are for suckers" … we just wonder how all those haircut-template'd Cypriot depositors will feel about bailing out their EU 'partners' in Italy?

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Submitted by Matt Slowikowski via OilPrice.com,

Electric cars are often touted as the nail in the coffin for gasoline-powered vehicles. However, there’s another fuel revolution in the developing world, which is changing the economics of electric cars. Whether it’s CNG, LNG, autogas, or propane, gaseous-hydrocarbon fuels turn conventional cars into dual-fuel vehicles, and limit the uptake of electric cars in these economies.

Tesla and the lost supercharger stations

(Click to enlarge)

A quick look at the map of Tesla supercharger stations across the planet poses some interesting points: There are curiously few supercharger stations in south-central America, with only one in the Latin-speaking part of the new world. Few exist in Eastern Europe, Spain, Africa, the Middle East, India, or Oceania. This map can be correlated to GDP per capita, GDP, infrastructure, the country’s electric car incentives, and the uptake of dual-fuel vehicles. For the average consumer, it’s simple economics—their area of residence drives their vehicle fuel choices.

Balancing economics, power, and emissions

In developing countries, the choice to install a dual-fuel option is economics driven, rather than an environment-conscious one, according to the Natural Gas Vehicle Journal. According to the journal, most countries can expect a 40-60 percent reduction in fuel costs, which is more compelling in a second world where fuel costs are a larger portion of incomes.

(Click to enlarge)

The vehicle fleets in these countries tend to be aging, and the choice between going electric or going LPG or CNG is often not tied to buying a new vehicle. Developing countries opt for a mixer-type dual-fuel system ranging in cost from $300-$1,000 with an average 25 percent power loss, while those going to dual-fuel in first-world countries opt for more expensive injector-type systems that result in a slight power increase – these systems average $6,000. Those touting electric cars often consider lifecycle costs of purchasing two new vehicles, while consumers in second-world economies look for cost reductions in the vehicles they currently own.

(Click to enlarge)

Regardless of the type of dual-fuel system, these systems always have the side-benefit of reducing CO2 emissions. A 2009 EPA study found an 18-30 percent reduction in CO2, depending on the secondary fuel used. With a significant reduction in fuel costs, and tailpipe emissions, the economics for electric cars over dual-fuel cars becomes murky at best for many developing economies.

(Click to enlarge)

Simple modifications, non-standard fuels

Switching petrol cars to dual fuel is relatively easy. To do so, the following components need to be installed: a new filling point, tank, ECU, injectors, reducer, pressure sensor and an electronic switch. Dual-fuel vehicles have switches allowing them to go from petrol to gas. Related: U.S. Production Is Falling, Why Isn’t Oil Recovering Faster?

Despite the relative ease of modification, there is a challenge in fuel standardization across countries. LPG, composed of 60 percent propane and 40 percent butane is more common in Eastern Europe, propane is common in North America, while in South America CNG is preferred. Unfortunately the ingenuity of these second world economies doesn’t come without cost. The cheaper systems often installed in the developing world, lax enforcement of laws such as mandatory five-year tank tests, and lack of awareness lead to many explosions of these cheaper systems.

Worldwide spread

Many countries have opted for dual-fuel vehicles, with South America being the most prominent region. With Brazil’s uptake in natural gas vehicles, it’s no surprise that Sau Paulo is the world’s largest city economy currently without a supercharging station. In oil-abundant Iran, natural gas vehicles proliferate, and government subsidies contribute to natural gas fuel prices being 75 percent lower than gasoline.

China looking to break the trend

The Tesla map has one glaring exception to the GDP correlation—China. Despite having almost 4 million dual-fuel cars, last year China quadrupled its electric car sales to over 330,000 vehicles. This was largely driven by government incentives and a limit on the number of gas cars in large cities such as Beijing. Electric cars are often the only options for those looking to drive in larger cities in China, where officials are looking to reduce pollution in its megacities.

Navigant research forecasts that Asia-Pacific regions will become more important for the Li-ion electric vehicle market in the next decade. In a country like China that already has a significant amount of CNG cars, it will be interesting to see how the market dynamics will develop as three different technologies fight for market share.

Although electric cars have made significant inroads to wealthier countries, there have been adoption challenges in second-world countries. Currently this is largely driven by economics, with the lower entry costs of going dual-fuel outweighing the long-term savings of electric cars. These trends are compounded by a lack of infrastructure, such as Tesla’s superchargers.

Long-term, carbon emissions plans and the COP21 Parris accord and its CO2 neutral mandate could push these countries farther toward dual-fuel, rather than electric. The earlier adoption of dual-fuel vehicles was limited in the first world due to regulations driving up installation costs; while in the developing world, dual-fuel cars could have had a human cost linked to a lack of regulation. There is one given with both electric and dual-fuel vehicle adoption: the world’s oil consumption will be adversely affected.

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The US oil rig count rose 6 to 357 this week – this is 6th rise of the last 7 weeks (up 41 rigs) – the biggest absolute rise since May 2014. Off the lows, the US oil rig count is now up over 10% – the most since Dec 2011. Of course, oil prices are rallying on this news…

• *U.S. OIL RIG COUNT UP 6 TO 357, BAKER HUGHES SAYS

The oil rig count continues to track 3mo lagged WTI prices almost perfectly…

 

And the impact on prices, after some early strength from Exxon declaring force majeure in Nigeria and restricting 672k barrels per day, was a rally in prices.

 

Charts: Bloomberg

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Following yesterday’s stronger than expected results from JPM, today Wells Fargo – America’s largest bank by market cap –  is having a far less pleasant day, trading down 3%, on what superficially was disappointing earnings.

What was the problem? There were several.

First, net income slid to $5.6 billion, or $1.01 a share, from $5.72 billion, or $1.03, a year earlier despite a nearly $1 billion increase in revenue to $22.2 billion. While matching the consensus estimate, the number wasn’t exactly true. As Macquarie’s David Konrad calculates, when one excludes $447 MM in securities gains, a $154 million MSR hedging benefit, $290 million gain from sale of health services business, one gets a bottom line result of $0.90, a 10% miss to the consensus $1.00 estimate.

Another problem: loan growth was lower than expected, as total loans climbed 7.7% to $957.2 billion, well below the loan machine that JPM has unleashed in recent quarters, while fees collected from cards rose 7.2% to $997 million. Other segments of the business were in outright decline, with profit from wholesale banking down 5.4% to $2.07 billion from a year earlier, while community bank earnings declined 1.2% to $3.18 billion. Wealth-management net income slid 1% to $584 million.

Just as disappointing was that mortgage banking revenue for the largest US lender declined by 17% from a year earlier to $1.41 billion, falling well short of the $1.8 billion estimates of Oppenheimer & Co.’s Chris Kotowski and Jefferies Group’s Ken Usdin.

Even more disappointing was the bank’s continuously declining Net Interest Margin: for a pure-play bank like Wells (which unlike JPM and BofA does not have extensive sales and trading ops to buffer earnings), NIM is the bread and butter of the business. As such, the NIM decline to new all time lows of 2.86%, “on growth in long-term debt, deposits and lower income on investment securities reflecting accelerated prepayment”, below the expected 2.90%, was an even bigger red flag, as it shows that Wells is having major trouble adapting to record low yields (and neither we, nor Deutsche Bank can blame it).

 

But the biggest problem facing Wells is a well-known one: its extensive exposure to oil and gas companies, read shale, whose loan quality – as we all know – is deteriorating by the day and will continue to do so as long as oil refuses to rebound strongly to where it is actually profitable for highly levered companies, so somewhere north of $60.

Recall what we wrote last quarter, when Wells finally disclosed its “dire” energy portfolio.

Finally, we get to the real meat – Wells’ Oil and Gas loan portfolio and total exposure. Here are the details:

 

Oil and gas loan portfolio of $17.8 billion, or 1.9% of total loan outstandings

 

 

 

The total outstanding amount was up $474 million, or 3%, from the
$17.4 billion in 4Q15 on drawn lines and the acquisition of $236 million
in loans from GE Capital

 

Outstandings include $819 million second lien and $374 million of mezzanine loans

 

Wells reports that ~7%, or $1.2 billion, of outstandings to
investment grade companies. This means that $16.6 bilion of Wells’
outstanding loans are to junk-rated companies, something we flagged four months ago.

* * *

On the other hand, total exposure of $40.7 billion was down $1.3 billion, or 3%, reflecting declines across all 3 sectors from reductions to existing credit facilities and net charge-offs. As expected, Wells has decided to start trimming it overall exposure by collapsing credit lines.

 

But the punchline once again, is in the reminder of just how generous Wells has been in lending to junk-rated oil and gas companies in the recent past to compensate for its declining NIM: Wells reported that ~22%, or $8.8 billion, of exposure to investment grade companies, which means $32 billion is to junk-rated companies.

 

It also means that much more pain is in store for Wells in the coming quarters unless oil stages a dramatic comeback.

Oil did not stage a dramatic comeback. In fact, after tentatively dipping above $50, it is almost back to levels where it was three months ago. Which means that Wells’ exposure is only going to sour even more, forcing the bank to keep reserving increasingly more for future credit losses.

Which brings us to the final point. As we concluded three months ago: “here is the recap: $1.1 billion in reserves provisions (an increase of only $200MM in the quarter), a total of $1.9 billion in non-performing Oil and Gas assets, a $1.7 billion allowance for Oil and Gas credit losses, and a total of $32 billion in junk rated oil and gas exposure? Something tells us that top chart showing Wells Fargo’s declining net income will not get much better any time soon…“

We were right. In fact, as Bloomberg writes today, “provisions for credit losses more than tripled to $1.07 billion from a year earlier, tied largely to the bank’s oil and gas portfolio, while net write-offs rose about 42 percent to $924 million.” As a result, net interest income, including the loan-loss provision, declined 2.8% to $10.7 billion from a year earlier.

And the chart that ties it all together: Wells’ long overdue admission that it is woefully under-reserved for what may be a deluge of loan defaults should oil fail to rebound strongly… and certainly if oil continues to decline, has finally arrived in the form of this chart showing its LTM loan loss provision expense. It is, in a word, soaring.

We continue to expect far more pain for the bank which continues to have the biggest exposure – that we know of – to oil ang gas.

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By EconMatters

We discuss the financial markets from Gold and Copper to Stocks and Currencies in this video. It was a very bad week for bond holders globally, but especially here in the United States.

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