2008 Again?
Mother's Little Helper portfolio was DOWN today -324.55 (+0.32%).
Overall GAIN YTD: +368.30 (+0.37%).
Our benchmark index, the S&P 500 is DOWN -0.65%
"What we know about the global financial crisis is that we don't know very much."
- Paul Samuelson (economist)
I made my buys for the year on December 28, 2017, see the new portfolio here (Click Here).
If You Hated Yesterdays Post... Seriously, if you hated my post yesterday, just stop here, you won't like today at all.
Banks Sell Off on Good News? Yesterday I said the banks would be huge, I was right, their earnings and revenues were huge. But I was wrong about how investors would respond. So someone will have to explain to me how this works; the big banks reported earnings and generally beat analysts forecasts and company guidance. Investors sold off these outperforming banks; JP Morgan down -2.71%, CitiGroup down -1.55%, Wells Fargo down -3.43% and PNC Financial down a whopping -4.14%. The commentary around these results seemed to be saying that while earnings beat expectations there were segments within each bank that didn't do as well as expected. Earnings and revenues beat but lending was down, or trading revenues were less than expected. If Jamba Juice increases their earnings and their revenues and did it by selling more medium size drinks than large drinks; who cares! A beat is a beat and one quarters results does not make a trend or show weakness in a business.
"Would I say there will never, ever be another financial crisis?
You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be,"
- Janet Yellen (Federal Reserve Chair)
Is It 2008 Again?
Just to jog every ones memory, the market rose to dizzying heights in 2007 and then fell all through 2008 and into the start of 2009, culminating in what we now refer to as The Financial Crisis and The Great Recession. Our current bull market in stocks began in early 2009. The crisis was precipitated by a practice known as sub-prime lending. This is mortgage lending to borrowers with less than stellar credit, income or even a history of paying back loans; also known as 'No-Doc Loans'. The money being made in sub-prime mortgages was so great that a derivatives market was created to buy and sell packages of these loans known as Mortgage Backed Securities. At the time even the ratings agencies couldn't value what was in these financial instruments. Other financial instruments known as CDO's (Credit Default Swaps) and Synthetic CDO's were created to continue what was essentially the trade in risky mortgages. When the house of cards finally feel we lost some large financial institutions, the big banks were forced into buying up several at risk financial institutions, the federal government jumped in with a bailout and began aggressively buying up treasury bonds and large sums of these risky mortgage backed securities to the tune of $4.5 Trillion, all to backstop the U.S and global economies from collapse. Sorry for the depressing tale that we all hoped to forget.
We're doing it Again
Yep that's right, the sub-prime mortgage has been renamed 'NonPrime Mortgage' and is being offered by several institutions.
Best estimates are that Non-Prime lending will be about $10 Billion this year, just a slice of the $1.6 Trillion U.S home loan market. However FITCH the credit rating agency expected $3 billion in non-prime mortgage backed securities this year and that estimate was up from $2 Billion at the beginning of the year. Clearly the market is accelerating faster than Fitch can model the growth. What's worse this time around is we have experience leading the charge. Several big players from the last crisis are in the Non-Prime lending market. HomeExpress of Newport Beach, CA is run by Kyle Walker, the former head of Fremont a mortgage lending institution called "unsafe" by federal regulators back in 2007. Dan Sparks, the head of the Goldman Sachs division that managed a portfolio of sub-prime loans where Sparks advised the firm to bet against these mortgages, earning Goldman billions on failed mortgage backed securities. Sparks left Goldman Sachs in 2008 to start his own firm (http://www.sheltergrowth.com/dan-sparks/) doing the same thing The US Senate grilled him for (https://www.youtube.com/watch?v=1kCuQsMAIUI). Dan Perl, the creator of the "NINA" loan No Income-No Assets and head of First Street was a top 20 underwriter in 2005. Perl no has a 'This Time It's Different' attitude and heads Citadel Servicing Corporation, touted as The Nations Premier Non-Prime Lender. PIMCO the worlds biggest bond dealer owns 25% of Citadel. Blackstone, one of the world's largest private equity firms has invested in several non-prime or Non-QM investments and has been aggressively expanding in this space. Credit Suisse and Nomura are financing originators. The credit rating agencies are approving securitization of these deals. While Moody's hasn't come back into this market, Standard & Poors apparently didn't learn their lesson having rated several deals this year; in case we forget Standard & Poors paid $1.4 Billion in fines for their role in rating inflation.
Who else is making these loans? Take a look at the long list which includes several large banks http://www.nonqmloans.com/non-qm-lenders/.
How Did This Happen Again?
Dodd-Frank.
Yep, that precious law that's being debated over and over again is actually what is allowing these non-prime loans. Don't get me wrong, I'm all for a lender making a loan to anyone they want, that's good for every one. What worries me personally is the slippery slope that leads to derivatives and another financial collapse. Dodd-Frank basically says, "You can't lie, can't cheat and can't steal. Lenders have to treat borrowers in a reasonable and honest way". No more zero down deals, income has to be verified, rates have to be appropriate to the risk. The over arching rule is ATR (Ability To Repay). So to over simplify this whole thing; lawmakers wrote an 800 page law (Dodd-Frank) to prevent another financial crisis, smart financial minds read all 800 pages and found that all they had to do was adjust the loan rate and actually take the time to verify ATR.
Stay Invested,
Clay Baker
Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
