DavidSchawel CFA

The embattled CIO unit at JPMorgan Chase & Co. (NYSE:JPM) which was rocked hard last year by major losses from the “London Whale” saga hasn’t missed on all of their trades. A close look at their holdings in their $360bil plus available for sale (AFS) portfolio reveals pretty substantial bets on UK & Dutch RMBS. As of year end 2012, JPMorgan Chase & Co. (NYSE:JPM) held over $70bil in non-US non-agency MBS bonds. This is a sizable stake in the European structured products markets, something that Reuters reported on earlier last year. “Indeed, the CIO almost single-handedly resuscitated European RMBS market in 2009, buying huge chunks of new issues and providing repo agreements on others. As one fixed-income head said, when selling European structured finance, the JP Morgan CIO was “your first call, your second call, your third call and your fourth call.”> With the dramatic rally in all spread products, non-agency MBS bonds have been big winners, and JPMorgan Chase & Co. (NYSE:JPM) looks to have began to trim their position during Q1 2013. Their 10-Q provides confirmation of this on Page 37 noting, “Securities decreased largely due to repositioning of the CIO AFS portfolio, which resulted in lower levels of non-U.S.
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The idea that the deposits of the average person in Cyprus (in addition to corporations, and Russian organized crime) could be confiscated via a levy has caused a great deal of fear in the financial markets.    For instance, to people in the United States it almost seems unfathomable that you could wake up to have JP Morgan/Wells Fargo/Any Local Bank take 7-10% of your deposits. Yesterday in the Financial Times, James Mackintosh showed a chart of the deposit rates for both Cypriot and German banks.  The difference was easy to see, as deposit rates (less than 1 year) in Cyprus have averaged over 4% for the last three years while German deposit rates have hovered around 1-1.5%.  As Mackintosh points out, over a three year horizon, a depositor in Cyprus would have earned roughly 13%, or ~10% over an equivalent German account.  This difference, as he points out, is ~10% or nearly the exact amount that was originally proposed as the levy on deposits over 100k euros. Better Idea? I’m clearly out of my element to discuss bank specifics in Europe (let alone Cyprus!) but I will carry on anyways.  US banks are all assessed fees (I’m simplifying the
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If you grow book value, particularly if your liabilities are short, you will grow market value.  Many reinsurance and insurance companies aim at growing fully convertible book value per share. Fully convertible book value per share assumes that you invest your dividends in the common stock (without taxation), and thus compound your gains through reinvestment, taking account of dilution.  Hmmm… when will someone dream up the idea of structuring an insurance company as an MLP or a REIT?  I don’t think it is likely, but maybe someone could dream it up. It also implies that all possible dilution is factored in from convertible preferred stock or convertible bonds.  Now insurance companies tend to trade near book value over the long run, so companies that can grow their book value rapidly and pay dividends can be interesting investments.  Particularly where the liabilities of the company are short — property reinsurance or personal lines insurance, growth in book value plus dividends tends to be a reliable indicator of value creation. If liabilities are longer, it gets more questionable, because under-reserving becomes more likely — it is very hard to be certain of the reserving of long-dated or volatile coverages. Anyway, here is
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The recent chatter this week involves the usage off the $1 Trillion platinum coin.  The purpose of this brief post is not to say whether this is stupid or brilliant, but rather to look at the mechanics involved and see whether it would in fact be inflationary. My understanding is that the $1T coin would allow the US to spend that amount as the coin is deposited at the US Treasury.  Unlike typical deficit spending, debt would NOT be sold the finance this transaction.  Usually, spending occurs and US Treasuries are sold to fund this spending.  So, $’s spent into the economy, while $’s are sucked out when people pay for the UST purchases.  In this case, $’s would be spent into the economy, WITHOUT a corresponding debt sale which would suck $’s out. Some commentators have suggested that the Fed could sell UST’s that they own to mop up the liquidity.  BUT, this still results in an increase of assets in the system.  Even if you sell UST’s, you are taking reserves out of the system and replacing them with UST’s – no change in net assets.  When you spend without a corresponding debt sale, that IS an increase
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  I recently had a chance to speak with Loomis Sayles’ Matthew Eagan who is co-manager of the famous Loomis Sayles Bond Fund led by Dan Fuss. We covered a number of topics ranging from the Fed, Europe, High Yield, Hedging Tail Risk, and many others.  You won’t want to miss it as he’s a very bright PM.  It should be posted Wednesday or Thursday on the CFA’s Inside Investor blog found here. I was honored to participate in Reuters 2013 Investment Summit last week in New York.  In Katya Wachtel’s article titled “Chasing yield, investors favor credit again in 2013” I join in the conversation.  Chasing yield is no doubt a continuing theme heading into 2013 as institutional investors far and wide are finding a diminishing set of opportunities available.  You are starting to see non-agency MBS become almost “too popular” as every Hedge fund is suddenly an expert!  Everyone thinks its a great play on a housing recover and an “easy way” to earn 4-6% returns.  The low hanging fruit has been picked!  Funds such as DoubleLine, Ellington, and Elliott have apparently moved more towards CMBS & CLOs versus incremental non-agency investments. Heading into next year, I’d have to think that the majority
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Earlier this week I published a piece on the CFA Institute’s Inside Investing section titled: Mortgage REITs: Does Doubling the Leverage Make Them a Good Investment?  The post was my response to UBS launching an ETN that provides 2x leverage on a basket of already heavily levered mortgage REITs “mREITs”. In short, I believe it’s a dangerous product as many investors in the underlying REITs have little idea how 10%+ yields are being generated.  Moreover, they don’t understand the scenarios that could lead to a significant decline in share prices.  To paraphrase the great Howard Marks, “…do not confuse adding leverage to an existing investment with increasing return…if you take a 10% return in a security and lever it up 4x and after financing costs generate 15-20% returns, you haven’t increased your returns, you’ve just increased your leverage and significantly increased your risk, but you’ve also got a 20-25% downside threat”.  I think this thinking certainly applies to mortgage REITs today. A bigger threat is upon us Last week Annaly Capital’s CEO Wellington Denahan-Norris (who this week replaced the late Michael Farrell who tragically passed away), said some very interesting comments to Bloomberg on the state of the risk markets.  After discussing
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That was the question that Bill Gross asked in his latest monthly outlook.  For now, that’s likely much more of a fear tactic, but as investors we must always understand the risk/return characteristics of our investments. In my latest for the CFA, I perform some very elementary bond math on the 10yr treasury, showing the risk/return for various movements in interest rates.  I then look at the holdings of the Barclays PLC (LON:BARC) (NYSE:BCS) aggregate index, which many bond funds are based upon, to give investors an idea of what they may be holding. It’s getting tougher and tougher now to be invested in the fixed income markets. Previously attractive risk/return asset classes, such as non-agency MBS, high yield, and others do not have nearly the “margin of safety” they had even nine months ago.  Central bank balance sheet expansion has changed the economics of the fixed income markets. Everything has rallied and we need to constantly re-assess the attractiveness of such investments. The premise of his article is that the United States needs to get its fiscal house in order or else the Fed will be stuck printing money to pay the debt deficiencies. Strangely, Gross asserts that the United
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The latest in my recent posts for the CFA Institute.  I think overall I am more bullish on the actual economic impact that QE has had via the refinancing channel (it’s very material), but maybe more skeptical on how perilous of a hole the Fed is digging itself into by buying so much of the Agency MBS market.  I obviously think the ramifications and understanding of QE are crucial in the day and age in which we live.  I’ll post an excerpt below and read the full version on the CFA’s website.  Thanks! ther risky asset classes as the prices of these bonds rise (yields fall). To put the purchases in perspective, it’s important to understand the monthly production of agency MBS. At the moment, about $125 billion of agency MBS (mortgages backed by Fannie Mae and Freddie Mac) are produced each month. Through Operation Twist and the reinvestment of previous rounds of QE, the Fed is already purchasing ~$30 billion of bonds per month. Add in the $40 billion per month that was just announced for the third round of QE (QE3), and the Fed is purchasing ~$70 billion of the ~$125 billion that is produced each month. Purchasing
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By David Schawel, CFA of Economicmusings   To QE or not to QE dominates economic headlines of late.  Lost in this debate is a readily available but under the radar tool that the Fed has at its disposal. Slowing global growth, and subsequently lower interest rates, has given credit worthy borrowers an opportunity to continue a now annual tradition of refinancing their mortgage. While many are content, mortgage market participants know that the primary/secondary mortgage spread shows that rates should be even lower!.  More specifically, this spread is above 50-70bps higher than the longer term average. Big banks have failed to ramp up capacity, and consequently the rate between what MBS holders earn buying a bond and the rate the borrower pays has expanded. What does this have to do with the Fed?  An astute Credit Suisse analyst pointed out this week that the Fed could perform a “MBS Twist” operation in which they sell up in coupon premium MBS pools and buy lower coupon MBS which could have the affect of lowering mortgage rates to borrowers.  In their own words: “…this policy will specifically target the near par secondary MBS rate, the key driver of the primary rate that is offered
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The Economics Behind the HARP Program HARP, The Home Affordable Refinance Program, is a streamline refinance program developed to help borrowers who have continued to make their mortgage payments, but have be unable to refinance due to a decline in their home value.  Underwater borrowers have been stuck in a “no-win” situation of sorts, being stuck in a well above market mortgage rate (over 6% in many cases) despite being current on their existing loan and maintaining strong credit.  Various fees and a LTV ceiling cause the original HARP program to flame out unsuccessfully.  Blame was quick to be cast among the major lenders, the GSE’s, as well as the Government. The early results of HARP 2.0 are in, and the program’s modifications appear to be spurring strong activity.  Are the big bad “too big to fail” banks finally relenting and playing ball?  As an investor in the securitized mortgage market, I see aspects of the market that the average borrower or market participant does not.  In this post I will walk through the economics of mortgage origination for HARP loans, break down exactly how much these banks are making, and how they are able to do so. Mechanics of
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  By David Schawel, CFA of Economicmusings A great report was put out today by Neal Soss and Dana Saporta of Credit Suisse on the Student Loan situation in the US.  Here are five charts that stood out: A great report was put out today by Neal Soss and Dana Saporta of Credit Suisse on the Student Loan situation in the US.  Here are five charts that stood out: 'Get ValueWalk's Daily Edition By Email and Never Miss Our Top Stories'
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