Today's Tidbits

Sales of Bear Stearns Hedge Fund Assets Has Market Worried About Margin Calls
From Dow Jones: “The sale of collateral held by two hedge funds at Bear Stearns Cos. has the mortgage bond world holding its breath as investors pore over the $850 million worth of assets on the block. The forced sale, mostly of collateralized debt obligations,
could have wider repercussions in the credit markets as investors rethink valuations of bonds where subprime mortgages reside, and the structured finance products where a bulk of these bonds live….the concern is that the heavier than usual volume could
cause a broader repricing of bonds as the market struggles to digest the supply. This repricing, in turn, could lead to lower valuations of assets in portfolios. “If the prices realized for the securities cause people to mark their holdings lower, there is the fear that it could lead to more margin calls,” Wulf said. Then, he added, if a highly levered entity fails to make those margin calls, it could lead to further liquidations.”

Doom and Gloom on Housing Market
From Bloomberg: “The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported. ``It's a blood bath,'' said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., …``We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.'' Confidence among U.S. homebuilders fell in June to the lowest since February 1991… Housing starts declined in May for the first time in four months…New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession…Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006… Before last year, the index had gained sixfold in five years…The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago… ``Prices are going lower,'' …In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago. About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003…Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage…Roubini predicts the decline in U.S. home sales will last at least another 12 months, reducing the median house price by 5 percent this year and next. That would take home prices back to 2004, when the national median was $195,200…``The subprime market has changed character dramatically, and that takes a number of entry-level buyers out of the picture,'' …The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast. Measured annually, the national median price for a previously owned home hasn't dropped since the Great Depression in the 1930s, according to Lawrence Yun, an economist with the trade group. This year it probably will fall 1.3 percent, Yun said. The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record…Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed…``We have a lot of people, even prime borrowers, who are at the edge because they either bought with no equity, they have an ARM that's seen a rate spike, or they used their house like an ATM and turned their equity into cash,'' …``Many of those people are under water today, and if they have to sell, it's going to drag down values in their neighborhood.'' …``Prices will continue to soften for as long as we have distressed sellers,'' … Some regions of the U.S. could see price declines of 10 percent in the next six to 12 months…``A lot of people went out on a limb to pay the record high prices for homes, and they're in trouble now,'' …Borrowers who got loans with so-called teaser rates are in the biggest bind, … Prices surged a record 12 percent in 2005, spurring buyers to ``stretch'' to qualify for bigger loans by using interest-only ARMs or so-called option ARMs with low introductory payments.”

China Retreats From Ethanol as Food Requirements Beat Fuel Demand
From The Financial Times: “Eight years ago, China's technocrats came up with an idea for what to do with the government's vast stockpile of corn reserves, a stockpile that was going stale. The plan was to transform the corn into starch, sweeteners or ethanol, which could be blended with gasoline to run cars. The move would create valuable products and potentially reduce China's oil dependency. Now there is growing concern that creating biochemical and biofuels industries worked too well. The stale corn reserves are used up and there is increasing competition for fresh supplies between rapidly growing industrial processors and livestock farmers who rely on it as feed for animals…Rising food and grain prices have propelled higher levels of inflation since last October…The search for corn sent China, the world's second-biggest corn producer, back into international markets in 2005 for the first time since the mid-1990s. …The government has halted approvals for new corn-based ethanol plants and is developing alternative biofuels using non-food crops.”

Demand For Russian Debt Grows as Oil Fuels Economic Recovery
From The Financial Times: “After Russia defaulted on its domestic debt in 1998, it was almost unanimously shunned by bond market investors. One foreign banker even claimed that he would rather eat nuclear waste than buy Russian paper. But rouble bonds are back on the menu. The market has taken off in the past 12 months, driven by the surge of issuance in corporate paper…The strength of demand has led to a dramatic compression of Russian corporate yields in the past two years, by about 70 basis points for top-class borrowers and 150bp-200bp for borrowers in the sub-investment grade category, in US dollar terms…The growing appetite for rouble bonds from domestic and increasingly international investors mirrors the dramatic change of fortune for Russia’s economy, which is buoyed by high commodity prices and swollen foreign currency reserves. Among the buyers, banks are the most active but there are also investment funds and asset managers, insurance companies and non-government pension funds. “We are starting to see for the first time more interest coming from Asia, both institutional and retail clients, which is new,”… “Now that Russia is firmly within the investment-grade universe, more investors are willing to take on both credit and currency risk by buying rouble-denominated corporate bonds.” The possibilty of further appreciation in the currency – which has risen about 9 per cent against the dollar in the past 18 months – gives investors potential extra return in addition to the bond coupon. And the rouble is “perceived as a strong and steadily appreciating currency”… Bankers say two technical developments in the past year have played a significant role in spurring bond market activity. Last July, the Russian government lifted all currency controls on the rouble, making it fully convertible. Investors are now able to move roubles freely in and out of the country, non-Russian investors can open rouble bank accounts and restrictions on rouble fixed-income investments have disappeared.”

MISC

From Dow Jones: “U.S. Treasury prices were lower [2y Treasury yield rose 3.5bp, 10 & 30y yields rose 6bp]… as the market showed no overt sense of concern over trouble at hedge funds run by Bear Stearns….The dollar continued to move along in tight ranges against the euro and yen in a session lacking any important U.S. data. A big mover Wednesday was sterling, which hit a two-week high against the dollar of $1.9946 after the minutes from the Bank of England’s last meeting were released, showing that
four board members favored a hike. This suggests rates could be lifted by the BOE in July….U.S. stocks fell in volatile trading Wednesday, [Dow fell 146 points] as rising bond yields kept a lid on the market, offsetting enthusiasm over oil prices backing away from $69 a barrel, blow-out earnings from Morgan Stanley, and a $22.5 billion share buy-back from Home Depot Inc. Leading the gains among blue chips, shares of Home Depot surged 6.6% after the home-improvement announced it would buy back up to $22.5 billion of its own shares. Trading volumes showed 1 billion shares exchanging hands on the New York Stock Exchange and 1.2 billion on the Nasdaq stock market. Declining issues topped gainers by 21 to 10 on the NYSE and by 9 to 5 on the Nasdaq….Crude oil futures were sharply lower Wednesday morning, after dropping in reaction to a mixed weekly inventory report, which showed surprisingly large builds in U.S. crude and gasoline stocks but an unexpected drop in refinery utilization.”