Randolph,
Sorry- early AM and missed his "peak" comment.
Here is Neil George's take on all ths sub-prime hype: (Yes, just like everything all of us post- it is spin):
"On to today’s issue:
Subprime isn’t necessarily a bad word—unless you keep tuning into the talking heads on television or reading all the incessant stories of agony and defeat from Wall Street.
Too many folks are getting edgy over credit conditions. The hyped-up stories of a few so-called subprime lenders going belly-up is only getting more folks needlessly worried, and they’re missing the real story of the markets.
Like everything else, the credit market--from banking to mortgages and even corporate bonds--isn’t a monolith. Rather, it’s a wide, varied collection of different participants.
Although it makes for a grabby scare story that’s good for those doom-and-gloomers, it’s not going to send the markets or the economy into the dumpster.
Instead, pay attention to the reality and not the hype and we’ll all make more money with biggie yield payers, rather than losing out by getting clutched up and holding too much cash.
It comes down to understanding the market and knowing that nothing is indexed when it comes to knowing whether one of our bonds or other investments is in trouble--or is actually in good shape in opposition to what the Street is saying about the industry or an index.
The key to knowing the market is to ignore the market and instead, focus on the fundamentals of what you’re investing in.
The market is focused on the biggie indexes, which usually are made up of large companies that have their own problems and usually shouldn’t even be followed--let alone invested in--anyway.
Just focus on the real meat of the matter. In the credit markets, that means watch for default rates. For the past year, despite the hype to the contrary, default rates for lower-grade credit issuers in the so-called dodgy junk market--including edgy mortgage and consumer lenders--has maintained one of the lowest levels in decades at a mere 1.8 percent.
While a few lenders have run into trouble, most are doing their job of managing credit and their balance sheet risks.
This is across the board in all industries. So while the Wall Street guys are saying avoid risk, behind the scenes, their pals in the dealing rooms are backing up the trucks and buying what they’re telling investors to avoid.
This is classic Wall Street. Its brokers tell us to buy what they want to sell--remember the dot-com stuff--while they tell us to sell what they want for themselves, which now means lower credit-rated stuff with biggie yields and sustained positive performance.
Before you get clutched up on whether the mortgage, consumer lending or corporate markets are in deep doo-doo, take a deep breath and simply look at what we’ve been buying and owning--without the hype--and go through the reality of the numbers. This cuts across the industries and market segments of our bond and other holdings.
At the same time, there’s a good question out there: Are we pricing in enough risk premium in the yields of our bonds and other securities?
Lesser credit-graded stuff has been working for a while now, and it’s what I’ve been writing about in By George as well as Personal Finance, Inner Circle and Bond Desk.
Meanwhile, everyone from the talking heads to the pop financial papers have been asking, “Is this so-called junk not priced high enough in yield to justify our risk?”
For us, the real question is this: Is the supposed risk-free US Treasury market too cheap relative to its supposed sacrosanct credit?
That’s the query that hasn’t gotten enough attention--if any at all--in the markets or the pop press. To answer it, it really comes down to the fact that the Treasury market is increasingly becoming a no-man’s zone for heavy money.
Where’s the action in Treasuries? Folks used to get all hot and bothered trading T-bonds and notes and speculating on all the comings and goings in this market. But with more and more chunks of the market easily fully priced, there are less and less bits that have any under- or overpriced values.
Meanwhile, the rest of the bond market has continued to gain some further attention, because there’s more room for traders and investors to work with in market pricing inefficiencies.
The pricing of Treasuries isn’t getting the action needed to drive yields lower to where they should be, given all of the heavy money in the overall bond market. Instead, that heavy money is going where it can cash in on opportunities in the markets and not just grab yields.
Just because lower credit-rated stuff is closing in on Treasury yields, it doesn’t spell doom for the market as being overpriced. Instead, we should continue to see even tighter spreads on good quality issues that are handpicked by the astute trader and investor with less regard to what S&P, Moody’s and/or Fitch’s has bestowed on them for a fee by making calls on their own.
On mortgages, note that the subprime issue is really just about a handful of companies that didn’t do their jobs correctly in the first place when lending or buying loans--and now they’re paying the price for it.
Many of these companies have a nasty track record of mishaps on a regular basis, including H&R Block, Washington Mutual and even Countrywide. So don’t just say that it’s an industry or economic thing; it really comes down to a company and management thing.
Remember that out of the $17 trillion or so worth of current US housing stock, at worst, we’re looking at loan workouts of maybe $1 million. On the mortgage side, with some nearly $9 trillion in mortgages, again perhaps some $200 billion or so will have some issues.
We’re talking about some pretty meager numbers in looking at the overall mortgage and housing market.
On the mortgage company front, while others fret over subprime stuff, we’ll continue to buy the best, which are being brushed with the perils of a few bad apples, without even having to look at subprime lending.
This includes my favorite mortgage company out in Santa Fe, NM. The company’s common stock has its great, long-proven portfolio yielding more than 10 percent. On the preferred front, it has a great 8 percent preferred with less volatility than the common stock--perfect for those investors who aren’t up to the thrills of the markets.
On the bond side, this company again has a great 8 percent issue due in 2013, priced to yield just a couple of basis shy of 8 percent. All are rated by the biggie Wall Street guys in the lower-B range.
And this mortgage company doesn’t get into subprime."
Brad
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