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It looks like the next phase of sub-prime carnage is kicking off.
US markets fell sharply yesterday as Carlyle Capital Corp (CCC), a fund set up to invest in US mortgage debt, warned that it had missed margin calls to several of its creditors. The heavily leveraged group doesn’t have the money to back its bets, basically.
It seems the group had been buying up AAA-mortgage debt issued by key US mortgage lenders Fannie Mae and Freddie Mac, believing it had fallen too far. These agencies are government sponsored, which means they’re generally seen as safer. Market timing of course, is notoriously difficult, and the AAA debt kept falling anyway.
CCC holds more than $22bn of the debt, raising fears of a fire sale which hammered shares of other groups holding the same debt. And CCC wasn’t the only one selling…
As Carlyle Capital Corp (CCC) was falling behind on its payments, so Swiss bank UBS (UBS) was apparently clearing out its books of the next wave of sub-prime rubbish to collapse. According to Bloomberg, UBS is apparently selling off $24bn-worth of mortgage-backed debt, thought to be “Alt-A” debt.
Alt-A debt, as one wag put it, is either near-prime or near-sub-prime, depending on how you want to look at it. I’m backing near-sub-prime, needless to say. These loans were generally given out to people with decent credit scores, but no documents to prove their income as such. Sounds like an open invitation to fraud during the boom times, doesn’t it? After all, if everyone else is exaggerating their income to get on the housing ladder, then why not you too?
So now that the credit bubble has popped, investors are realising that these ‘Alt-A’ mortgages aren’t any better than all the dodgy subprime stuff that has already collapsed. And now they’re trying to bail out of this as rapidly as possible too.
There are plenty of British banks with exposure to this stuff too. It was only last month that HBOS (HBOS) revealed it had exposure of about £7bn of Alt-A. At that time, HBOS didn’t feel the need to write down the assets. It might not feel quite so comfortable about that assumption today.
Britain’s biggest housebuilder starts to suffer
Especially as there are no signs of the US housing market improving. Taylor Wimpey (TW), which has exposure to the US, UK and Spanish housing markets (it’s hard to think of a less fortuitous property portfolio, unless you threw Ireland into the mix as well), turned in a loss of £19.5m, from a pre-tax profit of £406m the year before.
Britain’s biggest housebuilder said that prices across its US portfolio had fallen by 17% in the year to December. The majority of its exposure is to California and Florida, which have been hit hard in the crash, even by current US standards. The number of US sales dived by 2,000 to 6,740.
Chief executive Pete Redfern warned that the company isn’t expecting any recovery in the US this year, which is refreshingly honest. He also admitted that UK sales in the spring are likely to be “subdued,” with completions already falling 5.6% during 2007. The lack of confidence in the UK is also hurting the holiday homes market. Done deals at the group’s Spanish unit dived by 44%, from 379 to 212.
In all, at the end of February, the group’s order book was down 20% on last year, at £1.06bn. Unfortunately for Taylor Wimpey, this is at a point when it’s biggest market – the UK – is only just beginning to turn down. So it’s very likely that its results will be even worse this time next year. Suffice to say, I would keep avoiding house builders for now.
Turning to the wider markets…
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Rising oil price hurts BA
In London, the FTSE 100 was down 87 points at 5,766. Fuel-dependent stocks such as British Airways and Carnival suffered as the price of oil soared to new highs. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 was down 78 points, at 4,678. And in Frankfurt, the DAX-30 was 92 points lower, at 6,591.
Across the Atlantic, the latest bad news from the financial sector saw the Dow Jones fall 214 points to end the day at 12,040. The S&P 500 closed 29 points lower, at 1,304. And the tech-laden Nasdaq was 52 points lower, at 2,220.
In Asia, stocks took a pasting today on renewed fears of a US recession. Financials including HSBC and Bank of China weighed on Hong Kong’s Hang Seng index, which fell 841 points to end the day at 22,501. In Japan, the weakening of the US dollar against the yen hit exporters including Sony and Nintendo. The benchmark Nikkei index closed 432 points lower, at 12,782.
Sterling soars against the dollar
Crude oil futures hit a new high of $105.97 and closed above the $105 mark for the first time ever in New York yesterday. However, the price had fallen back to $104.93 today, whilst Brent spot was at $102.32 in London.
Spot gold had risen to $978.00 this morning, up from $976.20 in New York late yesterday where it fell back from its latest record high on profit-taking. Silver had fallen to $20.08.
Turning to forex, the pound hit its highest level against the dollar – $2.0130 – since December this morning, following yesterday’s decision to keep UK interest rates on hold. Sterling was also trading at 1.3073 against the euro. And the dollar was at 0.6493 against the euro and 102.12 against the Japanese yen.
And in London this morning, cut-price pub chain Wetherspoons tumbled by nearly 10% after announcing a 16% fall in first half profit to £18.3m. It is the latest leisure group to feel the effects of the smoking ban and consumers’ reduced spending power. Chairman Tim Martin said pub managers’ outlook was ‘slightly more cautious’.
Our recommended article for today…
Tax laws: save your sympathy for the Doms
– The run-up to the Budget has been dominated by the yelps of non-doms complaining about having to pay more tax. That means the one Budget change we really should be protesting about has been ignored. Merryn Somerset Webb looks at Government plans to strip a tax advantage from the nation’s small business owners here:
Tax laws: save your sympathy for the Doms