Opening Bell: Negative Yield

Panicking banks; more room to fall; WaPo shines, etc.

If it’s Monday, it must be analysis time. Bloomberg says that the sudden proliferation of belly-up hedge funds shows the industry is “reeling from its worst crisis in a decade.” This crisis has been sparked by the hedge funds’ lenders increasing their margin calls, which require firms who borrow money to make investments to increase the collateral they have backing those loans—or pay them off. That collateral has either become worth much less than it once was or the banks are panicked that it will become worth much less.

Our Quote of the Day puts its succinctly:

”If you have leverage, you’re stuffed,” said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won’t get their money back…

“There has to be more in the next weeks,” Allen said. “There are people who have been hanging on by their fingernails who can’t hold on much, much longer.”

Bloomberg says its the worst crisis since 1998 when the Russian debt default sent global debt markets tumbling and Wall Street had to orchestrate the infamous bailout of the Long-Term Capital Management hedge fund to prevent a market meltdown.

The Berg also reports ominously that at least one bank is demanding more collateral on even U.S. Treasury investments “backed by the full faith and credit of the United States.”

Exposed TIPS

Bloomberg writes that inflation-protected Treasury bonds are signaling extreme bearishness on inflation, having “never been so sure that the Federal Reserve will lose control of inflation.”

The wire service/terminal treasure chest says the yield on Treasury Inflation-Protected Securities is below zero for the first time ever. That signals that investors are so worried about inflation rising that they’re pouring into TIPS, driving up their prices, which move inversely to yields.

Essentially, a negative yield means investors are paying the government to borrow money. They’re doing that because the TIPS adjust the investors’ principal according to inflation, thus protecting them from price increases at a time when all investment markets are extremely unstable.

The man’s name is Engineer

The Financial Times leads its Companies & Markets section with news that margin calls and plain old panic over the prospect of further losses are squeezing debt instruments to record highs, which are in turn forcing the further unwinding of debt instruments, which will push prices higher and so on. The paper says the cost of insuring investment-grade U.S. debt more than doubled since January.

Liquidating structured credit instruments requires buying large amounts of protection using credit default swaps. This, in turn, drives the cost of protection higher, potentially triggering a chain reaction.

“There is potential for some wild and possibly inexplicable price movements as the unwinds get bigger,” said Mehernosh Engineer, credit strategist at BNP.

The Wall Street Journal reports a similar story in extreme jargon on C7. It says fear is creating a “vicious cycle” that is “crippling the market.”

This bond is unrated

In the you’ve-gotta-be-kidding department: Bond insurer MBIA begs Fitch Ratings to quit rating some of its units because MBIA is afraid Fitch is going to downgrade them, and it just doesn’t agree with that. If this doesn’t illustrate the fatal conflicts in the ratings business, we don’t know what does.

In a statement, (Fitch) said it could be difficult to maintain the ratings without access to nonpublic details of their insured portfolio and “it is unclear to us at this time as to whether MBIA will continue to cooperate with us in the rating process.”

Notably, the WSJ says that “Fitch has been the most aggressive of the three main rating firms in issuing negative assessments of bond insurers.”

More room to fall

The Wall Street Journal leads its A1 Business & Finance column with an analysis that finds that despite a 17 percent drop in the S&P 500 in the last five months (a 20 percent drop is considered an official bear market), stocks still aren’t cheap.

The Journal says stocks are trading at just 13.2 times earnings, well below the 16.5 “multiple” they’ve averaged since 1989. But inflation is rising, earnings are under pressure because of the all-but-official recession, and the outlook for everything under the sun is unsettled as the unwinding of the credit matrix continues to gather speed and force.

By the end of the bear market amid the nasty early 1980s recessions, stock prices fell to 8.7 times earnings. The current debt-market crisis and resultant economic downturn are increasingly seen as likely to be the worst since then, suggesting current stock prices have as much or more downside as they do upside.

A relatively stable sector

The WSJ leads its front page with an analysis that says the commercial real estate downturn will likely be less problematic than the residential one. That’s because construction in the commercial sector has been much more restrained over the last several years than home-building, and because unlike most homes, commercial buildings bring in rent and most are taking in enough to cover their mortgages.

The Journal notes that many of the problems classified as “commercial” are actually residential—condo developments, for instance. One in ten condo loans was past due at the end of the year. That’s a near-300 percent increase in twelve months. Just 1.6 percent of non-residential loans were delinquent.

Yes, you are being watched

The New York Times fronts an interesting piece of enterprise reporting that finds that attempts to quantify just how much information Internet companies are collecting from their users. The paper says it’s the first time such a thing has been attempted.

The meat of the story is buried way too far down in the story, but it’s worth reading the whole thing. The Times finds that the major Web sites like Yahoo and Google collect data hundreds of times from a typical consumer each month, and it notes that they’re not limited to their own URLs now, having spread their tentacles to thousands of other sites through ad networks.

Privacy advocates have previously sounded alarms about the practices of Internet companies and provided vague estimates about the volume of data they collect, but they did not give comprehensive figures.

The Web companies are, in effect, taking the trail of crumbs people leave behind as they move around the Internet, and then analyzing them to anticipate people’s next steps. So anybody who searches for information on such disparate topics as iron supplements, airlines, hotels and soft drinks may see ads for those products and services later on.

One of the more interesting things the story finds is that traditional media companies like the Times’ parent and Conde Nast are much more data-poor (and thus, much less valuable) than those founded in ones and zeroes. Conde Nast collects information an average thirty-four times per visitor each month compared to Yahoo’s 811.

During the Internet’s short life, most people have used a yardstick from traditional media to measure success: audience size. Like magazines and newspapers, Web sites are most often ranked based on how many people visit them and how long they are there.

But on the Internet, advertisers are increasingly choosing where to place their ads based on how much sites know about Web surfers.

Kudos to WaPo

It’s local, and it ran yesterday, but we think this story deserves widespread acclaim. The Washington Post on A1 investigates how developers subverted tenants-rights laws in D.C. with the help of the government and made hundreds of millions of dollars pushing tenants out. We quote at length:

Nearly three decades ago, city leaders created a law that gave tenants extraordinary power: the right to vote on whether property owners could convert rental buildings into condominiums. The law also requires owners to pay the city a fee on the sale of new condominiums, which would help displaced renters with relocation costs.

But as the District’s real estate market thrived, landlords found a way out: The law doesn’t apply to vacant buildings.

By emptying buildings and taking advantage of a provision known as a “vacancy exemption,” landlords can avoid the tenant vote and the tax and turn rental apartments into condominiums. City officials have granted the exemptions even when government records chronicled widespread evictions and buildings riddled with code violations.

In the past four years, nearly three-quarters of the landlords who received permission to begin converting apartment buildings into condominiums did so through a vacancy exemption, not a vote by tenants—saving $16 million in condominium conversion fees while families across the city lost their homes.

“The exemption is providing every incentive for a landlord to be aggressive, in some instances bordering on actually being criminal,” said Joel Cohn, legislative director with the District’s Office of the Tenant Advocate. “You have a real concerted effort to get rid of tenants.”

The Post reports several instances of outright thuggishness from landlords, who say they can’t make repairs without jacking up rents or converting to condos. But the paper says the law allows landlords to ask the city to let them raise rents to cover repair costs—when their return on investment falls below a healthy 12 percent. Just six of more than 200 applied, as the district’s raging condo boom inflated prices.

More like this, please.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.