Archive for September, 2009

New Record for U.S. Treasury–$7 Trillion

Kurt Brouwer September 23rd, 2009

The U.S. Treasury issued a new record of $7 trillion in bonds for the fiscal year that will end next week:

U.S. issues $7 trillion debt, supply to stabilize  (Reuters, September 23, 2009, Burton Frierson)

The U.S. government will have issued $7 trillion in bonds by the time the current fiscal year ends next week, but it expects the debt deluge to stabilize by mid 2010, a Treasury official said on Wednesday.

…However, this expansion may take place in an environment where investors consider leaving the safe-haven Treasury market for riskier assets, and debt issuance is likely to level off mid next year, said Treasury Acting Assistant Secretary for Financial Markets Karthik Ramanathan.

“In fiscal year 2009, which ends next week, Treasury will have issued $7 trillion in gross issuance — that’s in a 12-month period,” Ramanathan told a financial markets conference in New York…

A trillion here and a trillion there.  After a while, it adds up.  Not all of these bonds were brand new.  In fact, most of the bonds issued replaced bonds that were maturing.  Nonetheless, the new debt issuance is huge.  Reuters continues:

“This issuance was necessary to meet nearly $1.7 trillion in net marketable borrowing needs, nearly $1 trillion more than what we raised last year,” he added.

That’s sizeable.  $1.7 trillion in net new borrowing.

Finally, the headline of this piece cracks me up.  ‘U.S. issues $7 trillion debt, supply to stabilize.’  Since the Treasury determines what the supply is, I guess that’s like saying, “We’re borrowing scads of money now, but we plan to borrow less in the future.”  OK, that’s nice, but we’ll believe it when we see it.

The Biggest Bond Fund

Kurt Brouwer September 23rd, 2009

Morningstar reports on just how big Pimco Total Return Fund is.  It is the biggest — and my personal favorite — bond fund:

PIMCO’S Cash Haul (Morningstar Advisor, September 21, 2009)

Investors are still giving equity funds the cold shoulder, said Morningstar editorial director Sonya Morris. Fixed-income funds have received the majority of inflows this year. About 60% of August’s flows went into taxable-bond funds, and muni funds soaked up another 20%.

The biggest beneficiary of these trends is PIMCO. Its PIMCO Total Return PTTRX is the top-selling fund of the year. August inflows of $5.5 billion pushed the fund to a jaw-dropping $177.5 billion in net assets, Morningstar data show. To put that figure into context, PIMCO Total Return alone now represents 13% of the entire taxable-bond mutual fund universe. And it’s almost twice as big as the second-largest mutual fund, Vanguard Total Stock Market VTSMX. PIMCO Total Return is up 11.65% for the year through Sept. 15 versus the Barclays Capital Aggregate Index, which is up 4.9% during that period…

This is a case where a mutual fund has grown for all the right reasons.  Excellent performance, moderate expenses and very good publicity.  All hail Pimco.

If you take a look at some of these posts on Pimco, you can get a sense of what Bill Gross and the brain trust at Pimco have done over time to keep the fund on track and performing well:

Portfolio Changes at Pimco

Bond Market Vigilantes Ride Again

Pimco Adds to Government Bond Position
Full Disclosure: Kurt Brouwer owns Pimco Total Return Fund (pttrx)

What’s Down With Real Estate?

Kurt Brouwer September 23rd, 2009


Home prices are way down, but an uptick may be underway.  However, commercial real estate — office buildings, malls, warehouses, hotels, theaters — is still heading south.

Let’s start with home prices.  This chart shows the decline in home prices as shown by the S&P / Case-Shiller home price data versus the owners’ equivalent rent line (OER), tracked by the Federal government.

Owners’ equivalent rent attempts to measure the market value of homes in terms of rental income.  Without going into the details, I believe OER constitutes a good benchmark for evaluating whether or not homes are overvalued, undervalued or fairly-priced.

As you can see, we are getting back to a reasonable valuation level for homes.  However, markets typically overshoot on the downside of fair valuation just as they often overshoot on the upside.  If that’s the case, more trouble is ahead.

 

calculated-risk-caseshillerq22009pricerent-small.JPG

Source: Calculated Risk 

According to this data, home prices peaked in early 2006 and have slid ever since, except for a modest uptick in prices recently.  We do not know whether or not the bottom has been reached, but we believe we are quite close.  However, even if a bottom has been reached, real estate activity – sales of existing homes, new construction, remodeling – will remain at low levels for some time to come.

Commercial Real Estate:  Commercial real estate has also fallen hard although the downturn started later than that of residential.  Unfortunately, the decline and fall of commercial property has been very quick indeed. This chart compares the decline in residential with that of commercial. The blue-gray bars denote periods of recession.  The blue is residential and the red line is commercial.

calculated-risk-crepricesjuly2009-small.jpg

Source: Calculated Risk

As you can see, commercial real estate took longer to begin falling, but the downturn has been steeper.   Now, both real estate markets are off considerably from the highs.

With falling prices for homes, those who provided residential mortgages have been the big losers.  And, unfortunately, the government is the ultimate deep pocket when it comes to home mortgages through takeovers of Fannie Mae, Freddie Mac and the possible takeover of FHA.

With falling prices for commercial real estate, those mortgages are under extreme pressure also.  But, commercial mortgages are typically held by regional and local banks.  Those institutions are now struggling and we have seen a rash of bank failures as a result. In a way though, the Federal government is the ultimate guarantor for banks too through FDIC guarantees.

For more on bank loans, see Bank Problem Loans Keep Growing.

Treasury ends money fund guarantee

Kurt Brouwer September 21st, 2009

In another sign that the U.S. Treasury believes the financial panic is easing, it announced the end of government guarantees for money market fund assets.  The guarantee came about when the Reserve Fund, a large institutional money market fund ran into trouble due to holding over $700 million in Lehman Brothers short-term securities [emphasis added]:

U.S. ends backing for money market mutual funds (MarketWatch, September 18, 2009, Ronald D. Orol)

In one of its largest phase-outs of a government economic rescue plan to date, the Treasury Department officially ended its year-old program to guarantee money market mutual funds, the department said Friday.

…”The guarantee program for money market mutual funds served its purpose of adding stability to the money market mutual fund industry during market disruptions last fall and ultimately delivered a healthy return to taxpayers,” Treasury Secretary Timothy Geithner said. “As the risk of catastrophic failure of the financial system has receded, the need for some of the emergency programs put in place during the most acute phase of the crisis has receded as well.”

Treasury has had no losses under the program and earned roughly $1.2 billion in participation fees.

That’s nice.  The Treasury made $1.2 billion.  A billion here and a billion there.  After a while, it adds up.

Household Net Worth Gains $2 Trillion

Kurt Brouwer September 21st, 2009

bespoke-household-net-worth-6a00d8349edae969e20120a58064d0970b-800wi.png

Source: Bespoke Investment Group

I like this chart because it shows the growth in our net worth over a long period.  Net worth grew along with the equity market and when stocks began to falter in 2000, net worth kept going because home prices boomed.  When stocks fell again in 2008, real estate was also tumbling and net worth fell with it.  This chart illustrates how closely tied we are to the world of investments.

This piece from MarketWatch spells out the turnaround after a steady string of declines for our collective net worth [emphasis added]:

Household net worth rises for first time in two years (MarketWatch, September 17, 2009, Rex Nutting)

American households were $2 trillion richer on June 30 than they were three months earlier, the first time in two years that household net worth has increased, the Federal Reserve reported Thursday in its quarterly flow of funds report.

Household wealth rose in the second quarter at a 17% annual rate, or $2 trillion, to $53.1 trillion after falling at a 13% rate in the first quarter, the Fed said. It was the first time since the second quarter of 2007 that wealth had increased. Net worth is down $12.2 trillion from the peak in 2007, an indication of how much the collapse in stock prices and home prices have hurt. Read the full report.

…The rally on Wall Street was the main reason for the increase in household wealth, but rising home prices contributed as well. Wealth in corporate equities rose by $1.04 trillion, while real estate wealth rose by $139 billion. Assets held in mutual funds, life insurance and pension funds rose by $1.06 trillion…

It has been a long, hard slog for investors in stocks and in real estate.  No doubt there will be more trials ahead, but this is nice news.

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