The price of petrol

Business Week looks at signs that petrol use may be responding to the increase in prices.
For 20 years now, county workers in Palm Beach County, Fla., have been counting cars with sensors at strategic points along its 4,000 miles of roads. Nearly every year traffic volume has climbed at least 2%. But in 2007 there was a slight decline in the number of vehicles on the roads. This year traffic is down 7.5% through March. "We're seeing a very significant change," says county engineer George Webb. "We're having a good time speculating why."

It's not just Palm Beach. Traffic levels are trending downward nationwide. Preliminary figures from the Federal Highway Administration show it falling 1.4% last year. Now, with nationwide gasoline prices having passed the inflation-adjusted record of $3.40 a gallon set back in 1981, the U.S. Energy Information Administration is predicting that gasoline consumption will actually fall 0.3% this year. That would be the first annual decline since 1991. Others believe the falloff in consumption is steeper than the government's numbers show. "Our canaries out there tell us they are seeing demand drop much more considerably than the fraction the EIA is talking about," says Tom Kloza, chief oil analyst at Oil Price Information Service, a Gaithersburg (Md.) market research firm.

Of course, it is unclear at this stage how much of this is a response to higher prices and how much is a response to weaker economic activity.

Negative equity

The FT looks at the risk of a rise in negative equity and concludes that because of the relatively modest offerings by banks and the lower proportion of first time borrowers, there will be less negative equity than there was in 1990.

This may come as a surprise, given the problems that banks have encountered following their profligacy at the height of the housing boom. But the reason is simple. Unlike in the late 1980s, they have sought to gain a competitive advantage by offering low mortgage rates, rather than by seeking to out-do each other by offering ever bigger mortgages as a proportion of a home's value.

Bank of England figures last published in 2005 show that in the late 1980s more than 40 per cent of all mortgages - for house purchase and remortgaging - had loan-to-value ratios of more than 90 per cent. In recent years that number has halved to about 20 per cent.

House purchases by first-time buyers, the group that tends to have by far the highest loan-to-value ratios, were also much lower. There were 750,000 in 2006 and 2007, compared with 1.04m in 1988 and 1989. Working out the strength of every mortgage in the UK is difficult.

There are no data on the exact number of mortgages outstanding, the initial price paid and the subsequent movement in house prices. But the FT estimates that 350,000, or 2.8 per cent, of people owning their own homes would succumb to negative equity if prices were to fall 10 per cent.

If prices fell 15 per cent, the FT's estimate is still that only 5 per cent of mortgagors - 2 per cent of all households - would be in negative equity.

Kate Barker, a member of the Bank's monetary policy committee, arrived at the same figure in a speech in February that was based on a Bank survey.

They are also in line with the figures published by some lenders in their annual accounts. HBOS, the country's largest mortgage lender, says only 4 per cent of its stock of loans has a loan-to-value ratio greater than 90 per cent, while Nationwide, another of the country's big four mortgage lenders, has only 1 per cent of its mortgage book in this category.

Gary Styles, strategy, risk and economics director of Hometrack, says that many scare stories about negative equity use figures that are "very inaccurate and far too high".

"Most of the largest lenders in the UK have very few customers with less than 10 per cent equity in their properties and several of the biggest players have only around 2 per cent of their existing mortgage customers with less than 10 per cent equity," he said.

De-leverage

The FT provides a good overview of the way that the de-leveraging in the banking system spreads out through the rest of the financial sector.

The most leveraged funds are now borrowing no more than five times their asset base, compared with 10 times their asset base just six months ago, according to fund of hedge fund managers. The move comes as banks withdraw from risk-taking to repair tattered balance sheets, and places strains on formally lucrative hedge fund relationships.

This will reduce returns (and risk).

Mergers and market power

Do mergers increase prices and allow the new combination to gain market power? A new study suggests that they do. Looking at some extreme cases where makers of substitute products got together, Orley Ashenfelter and Danniel Hosken report an increase of prices of between 3% and 7%. This does not look at long-term cost improvements that may be apparent or the effect of the development of new products. However, given the large-scale industries that are represented, it does suggest a substantial transfer from consumers to producers.

Buffett talks

Warren Buffett talks to students about EMH and regulation amongest othere topics.

The answer is you don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time. There's only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. But they could buy a cross section of American industry, and if a cross section of American industry doesn't work, certainly trying to pick the little beauties here and there isn't going to work either. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.

Exchanges and Silos

The FT looks at the LSE model which uses the market and external settlement. The contrast is the virticle silo that is favoured by Deutsche Bourse. Though the EU Commission appears to be in favour of competition, there are some signs that sentiment in the US is switching towards the integrated model. Those exchanges that are integrated, appear to enjoy higher valuations.

And around, and around....

Macro Man with an excellent look at the way financial crisis comes around again.

LTCM

The carry trade

Markus Brunnermeier, Stefan Nagel, Lasse Pedersen look at the carry trade.

Our findings...show theoretically that securities that speculators invest in have a positive average return and a negative skewness. The positive return is a premium for providing liquidity and the negative skewness arrises from an asymmetric response to fundamental shocks: shocks that lead to speculator losses are amplified when speculators hit funding constraints and unwind their positions, further depresing prices, increasing the funding problems, volatility, and margins, and so on. Conversely, shocks that lead to speculator gains are not amplified.

John Jansen looks at the TSLF and finds some evidence that the pressure may not be as great as feared.

Another cause of concern was the result of the first TSLF operation conducted by the Federal Reserve to sop up unloved and difficult to finance collateral. The Fed offered the street $75 billion of Treasury collateral and took a similar amount of toxic paper from the street in return. The so called stop out rate was 0.33 .Here is what I think that means:According to the footnote on the Fed website the stop out rate is approximately equivalent to the spread between the Treasury general collateral rate and the general collateral rate for the pledged security over the life of the loan. That means that the person who got financed at 33 basis points received finacing for this unloved stuff at only 33 basis points over Tresury collateral. That seems to indicate a lower level of stress in the system than some had expected. Additionaly the level of interest in the new facility os light as only $86 billion of bids were received for $75 billion of Treasury collateral.

Liquid assets

The FT reports,

The Bank is preparing to swap illiquid mortgages, mortgage securities and other asset-backed securities on banks’ books for liquid assets it will provide, so long as commercial banks carry the can if the loans go sour.

“The banks neither need nor want the taxpayer to insure them against these losses,” Mr King insisted.

The Bank is now discussing with big UK banks how best this should be done. The options range widely.

At one extreme, perhaps the cleanest solution is for the Bank to purchase mortgages at a price close to face value, with the banks promising to insure the central bank fully for any loans that go bad. Taxpayers would take a hit only if the banks themselves went under while the banks would get cash, providing a welcome increase in tier one capital in return for illiquid assets.

Alternative mechanisms could include banks issuing covered bonds for the Bank to buy which are backed not only by the assets but also by the issuer. Or the central bank could buy mortgage-related assets at a big discount to face value to give taxpayers a high probability of coming out making a profit.

What were once liquid assets are no more.

William Painter's presentation on globalisation and education

glumbert - Shift Happens

Front page of the Economist

Let's see if it works. S&P 500 is currently at 1352.99.

Markowitz on line

Markowitz on line.

Reputation and liquidity

The Economist amidst a look at the Skilling evidence, makes the connection between Enron and the recent liquidity crisis for investment banks.

"For many people, the mere fact of Enron’s collapse is evidence that Mr Skilling and his old mentor and boss, Ken Lay, who died between his conviction and sentencing, presided over a fraudulent house of cards. Yet Mr Skilling has always argued that Enron’s collapse largely resulted from a loss of trust in the firm by its financial-market counterparties, who engaged in the equivalent of a bank run. Certainly, the amounts of money involved in the specific frauds identified at Enron were small compared to the amount of shareholder value that was ultimately destroyed when it plunged into bankruptcy."

This is a point made by, amongest others, Malcolm Gladwell. Gladwell asserts that it was the loss of reputation and the drying up of business (as was also seen at Arthur Anderson, that destroyed Enron rather than the fraud. Gladwell also suggests that Enron SIV 'practices' were not that unusual.

Football and globalisation

Dan Rodrik looks at European football to draw some lessons about globallisation

"But the most important lesson revealed by the Africa Cup is that successful nations are those that combine globalisation’s opportunities with strong domestic foundations. For the winner of the cup was not Cameroon or Cô te d’Ivoire or any of the other African teams loaded with star players from European leagues, but Egypt, which fielded only four players (out of 23) who play in Europe.
By contrast, Cameroon, which Egypt defeated in the final, featured just a single player from a domestic club, and 20 from European clubs. Few Egyptian players would have been familiar to Europeans who watched that game, but Egypt played much better and deserved to win"

Bear Stearns

Here are a number of comments on Bear

The WSJ.

Felix Salmon.

Steve Waldman.

New York Times on the financial crisis.

Crisis!

The FT's Lex provides a good summary of the questions that are being asked of European banks:

Investors are screening banks on three main criteria. Those failing even just one are seeing their share prices head south. First, does a bank have enough liquidity to stay solvent? That means looking at its funding mix, in particular its reliance on wholesale markets, and trying to work out whether mortal damage would be done to earnings if this source of capital dried up. This is where Bear tripped up, as did Northern Rock in the UK. It is also why Lehman Brothers and the Icelandic banks are under pressure.

But even banks that appear well capitalised are being marked down because of the third screen: asset quality. This fear of further writedowns is pervasive and poor disclosure has only added to the problem. Swiss bank UBS, despite a strong capital position and a raft of profitable businesses, is the highest profile victim of such distrust

Trader at the top

Mark Thoma look at the report of the Senior Supervisors Group on practices at major financial institutions in the run up to the current credit crisis.

"The senior management teams at some of the firms that felt most comfortable with the risks they faced and that generally avoided significant unexpected losses ... had prior experience in capital markets. Consequently, the nature of market-related events over the summer of 2007 played to their experience and strength in assessing and responding to rapidly changing market developments and issues such as uncertainty in valuations. As risk issues were identified and brought to the attention of senior managers, executives in many of the firms that avoided significant losses championed robust and timely risk mitigation efforts, including executing hedges, deciding to write down exposures, and enhancing management information systems."

The Laws of Anime

The Laws of Anime