Interest Rate Roundup

Wednesday, September 03, 2008

Thoughts on auto sales, hedge funds, big cuts at ResCap, and more

Lots of moving parts out there to keep an eye on today. For starters, we're seeing the first signs of financial fallout from the dramatic decline in the price of commodities and surge in the dollar -- macro hedge funds blowing up! Per Reuters:

"Hedge fund manager Ospraie Management LLC will close its flagship fund after it plunged 27 percent in August on losses in energy, mining and natural resources equity holdings, in one of the biggest ever closures of a commodities-focused hedge fund.

"The closure of the fund, announced by the firm's founder Dwight Anderson in a letter to investors on Tuesday, could be more bad news for Lehman Brothers Holdings Inc, which took a 20 percent stake in the hedge fund manager in 2005.

"One expert said the closure of the fund, which at the time of the letter's writing had lost 38.59 percent this year, may also have played a role in bringing down U.S. stocks on Tuesday, which fell after initially climbing more than 1 percent. Lehman shares were down more than 3 percent in after-hours trading.

"This is just adding to the fire for commodity-related names," said Peter Holst, managing director at Delta Global Advisors in Southern California. "Even this morning when the market opened, some of the names that Ospraie has positions in were getting hammered."

August auto sales results are also starting to trickle in and, as expected, they aren't good. Ford Motor's sales plunged 27% from a year ago, their 21st monthly decline in the past 22 months. Ford is responding by slashing its North American production plans for the second half of the year by 50,000 vehicles.

As for the credit markets, it's a bit of a mixed bag. Fannie Mae held a debt sale today and the spread over Treasuries at which it was able to sell its three-month bills contracted to 85 basis points from 89 points a week earlier. That's mildly positive.

At the same time, one of the biggest players in the mortgage industry is continuing to implode. GMAC just said it will shutter all 200 of GMAC Mortgage's retail lending offices. It will also stop making wholesale loans through its Homecomings mortgage broker channel and cut back on business lending.

All told, GMAC's Residential Capital (ResCap) division plans to slash its workforce by 5,000 employees, or a whopping 60%, through year-end. For some perspective, ResCap was the nation's sixth-largest mortgage originator in Q1 of this year, with $20.9 billion in volume according to National Mortgage News.

Meanwhile, Boston Fed President Eric Rosengren is out with some comments on the wires focused on the credit crunch. He is saying he expects unemployment to rise above 6% and is acknowledging that the Fed's aggressive rate cuts have been offset, to some degree, by tighter credit conditions. Here is an excerpt from his speech that explains the difference between a liquidity crunch and what we have now -- a generalized credit crunch:

"Before discussing a credit crunch, allow me to describe what I mean by a liquidity crunch. Simply put, the reluctance of banks to lend to each other became quite elevated, beginning in July 2007. A combination of balance sheet constraints, poor transparency regarding potential losses, and concerns about heightened counterparty risk contributed to less liquid financial markets. Uncertainty over asset valuations increased, and banks became reluctant to take on counterparty risk with certain financial institutions – particularly with those that have significant exposure to complex financial instruments.

"Turning to the notion of a credit crunch, we see that mounting losses at financial institutions, and an increasing reluctance among investors to invest new capital while the economic outlook is unclear, are forcing financial institutions to “shrink their balance sheets.”

"Allow me to explain that notion for the non-bankers here today. Recall that a loan is counted as an asset on a bank’s balance sheet. Banks hold capital in part as a reserve against the possibility that a loan will default. Thus banks attempt to maintain a reasonable ratio of capital to assets. If a bank experiences a reduction in the value of its capital or an increase in its assets (for example as credit lines that were extended in better times are tapped), the bank must take steps to shrink the asset side of its balance sheet in order to restore its desired capital-to-asset ratio.

"In other words, the bank becomes more restrictive in its lending. This shrinkage in lending entails tighter underwriting standards, wider interest rate margins, and reduced credit availability.

"An alternative is to raise more capital, but this can be quite difficult in times like these, when investors are wary of putting more money into some seemingly fragile financial institutions. Witness the reliance, particularly by some large, well-known institutions, on foreign sources of capital like the sovereign wealth funds in recent months."

UPDATE: GM sales were down 20.4% YOY, vs. a 29% downside forecast. I'm surprised the estimates were so far off ... there was plenty of evidence out there that the employee pricing deal GM offered during the month boosted sales relative to competitors/expectations. In other news, Toyota sales were off 9.4% while Honda sales were down 7.3%. Chrysler sales tanked 34%.


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    By Anonymous honda auto parts, at November 20, 2008 at 3:02 AM  

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