Morning Report: Pain in the distressed market 12/14/15

Markets are lower this morning as oil continues to fall and problems at a high yield mutual fund begin to spill over.

No economic data today. The markets will be focused on the Fed and the evolving situation in distressed debt markets.

Marty Whitman’s Third Avenue Focused Credit Fund has suffered losses as the rout in high yield has reduced liquidity. Dodd-Frank has severely curtailed market-making operations at investment banks, and right now there are very few buyers of distressed credit as hedge funds face redemptions and investment banks cannot step in because of capital requirement. In fact, the regulators are considering additional steps to ensure a bank failure doesn’t bring down the entire financial system, which means that investment banks will probably de-risk further, making them even less likely to act as market-makers. This will be an interesting first test of a financial crisis in the new Dodd-Frank world.

As a general rule, in credit crunches, the long bond rallies. You saw that on Friday, where the 10 year yield fell 10 basis points in spite of strong retail sales data. This week will be interesting between the evolving Third Avenue situation and the FOMC decision on Wednesday. LOs, expect bond market volatility this week.  As a general rule, tightenings have not had a dramatic effect on mortgage rates. In fact, the yield curve has flattened during all the tightening cycles since 1979. Granted, these tightenings have taken place in context of a secular bull market in bonds, so take this analysis with a grain of salt. That said, unless the economy really starts taking off (and you start seeing wage inflation), chances are that the 10 year yield increases less than the amount of the rate hike.  Note that CoreLogic is forecasting a 4.5% 30 year fixed rate mortgage by the end of 2016.


Mortgage loan performance has been improving, according to the OCC. Performing loans increased to 93.9% from 93% a year earlier. New foreclosures are down 22% YOY.

Ex GMAC Ally Financial is getting back in the mortgage business. Ally CEO said this about the move: “Don’t think of this as Ally going down the road of the old GMAC,” Brown said, referring to the home lending unit that brought Ally to the brink of collapse. The ironic thing is that the “new subprime” is auto loans, and that is Ally’s bread and butter these days. They are offering 8 year loans for new cars at rates at rates substantially below the 30-year fixed rate mortgage (think 3.5% range). Given that new cars depreciate like sushi, this is a very, very mispriced loan. If you are wondering why the Fed wants to get off the zero bound even in the face of zero inflation, there you go. Those sort of rates are a function of ZIRP and the impossibility of earning a decent rate of return. It would be ironic if the ne-er do well of mortgages had simply morphed into the ne-er to well of auto lending and we see a collapse in asset backed security liquidity.

13 Responses

  1. Hey! And a very merry Fristmas to you!

    I was worried you wouldn’t be posting, having been kidnapped by Occupy Wall Street while on the Left coast.


  2. They are incapable of learning:

    “Tight labor markets are created by the Fed”


  3. Facebook and comment sections allow for a lot of left wing and right wing memes with a very loose relationship to the facts. I find it fascinating that people have no interest in applying either a basic believability check, or at least Occam’s razor, to memes that make sometimes truly absurd assertions about what people have said or done and their positions on various issues.

    Some just fail any kind of credibility test. But it doesn’t matter, because it says the right sort of thing about those kinds of people, so of course it must be true. And if it’s not true, it might as well be, yes?

    One of those meme’s going around (and meme in the sense that it has been a featured article on many news sites, and liberals have been posting it with glee on Facebook and the comments sections of blogs) is that a small, backwards southern town voted against installing solar panels because they might suck up all the energy of the sun.

    Which sounds crazy, right? Because that’s not happened. The real story, of people concerned about property values and how they believed the solar farms looked at the fact that there were already a lot of solar farms in the area, is not nearly as sexy.

    I saw the “Crazy Southern Town full of Anti-Science Religious Types Votes Against Solar Panels Because They Think They Suck Energy Out of the Sun” meme plastered over Facebook this weekend. The Snopes clarification I had to go find for myself.

    In context, the original article doesn’t make it clear that the person with the complaint about the solar panels sucking up the suns energy mean what it sounds like he meant:

    Bobby Mann said he watched communities dry up when I-95 came along and warned that would happen to Woodland because of the solar farms.

    “You’re killing your town,” he said. “All the young people are going to move out.”

    He said the solar farms would suck up all the energy from the sun and businesses would not come to Woodland.

    Why is that last part not a quotation, but a paraphrase? Even if that’s what he said, I’m not entirely sure that’s what he meant, given the overall context. But maybe he said it and meant it. He was one guy, and I doubt the Woodland town council simply do that fellow’s bidding.

    The real problem, I suspect?

    The power generated would go directly into the electrical grid and would not reduce Woodland’s power bills.

    But that’s not the meme?

    Typical truthy non-news coverage from news sites:

    Trust no one.


  4. “I find it fascinating that people have no interest in applying either a basic believability check, or at least Occam’s razor, to memes that make sometimes truly absurd assertions about what people have said or done and their positions on various issues.”

    Why? The goal is to insult the other side, not further debate or care about the facts.


  5. “Right now the unemployment rate is at 5 percent”

    not even blogging true.

    h/t Ned.


  6. “offering 8 year loans for new cars”

    what could go wrong!


  7. I’m just holding out for the 60 year mortgage.


  8. @jnc4p: “The goal is to insult the other side, not further debate or care about the facts.”

    I guess I do not enjoy the same emotional satisfaction, thus I’m feeling all superior. 😉

    That’s where my emotional ‘whee, I’m better than everybody’ comes from, I guess.


  9. Just understand the actual nature of the country you are living in.

    It’s not really fascinating. It’s typical, and somewhat boring.


  10. @jnc4p: “It’s not really fascinating. It’s typical, and somewhat boring.”


    I thought had some unique insight to human nature or something.


  11. i’m hearing deal on omnibus and tax extenders.


  12. Ex-Im already reauthorized or is that in there too?

    Also, this is how you lose wars:

    “Why the U.S. Military Is Losing Its Carbon-Emissions Exemption”


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