Another unstable week on Wall Street opens up. First quarter profit numbers continue to disappoint across the board, showing just how widespread the damage from the housing depression continues to be.
But the real bad news is the near total collapse of the auction-rate market. Bloomberg has the autopsy.
The collapse of the $330 billion auction-rate debt market, a disaster for issuers and stranded bondholders, has made it possible for investors to earn 10 percent or more on top-rated securities.
Puerto Rico’s tax-free AAA 2024 general obligation bonds are paying 12 percent, equivalent to an 18.5 percent yield on taxable issues. That compares with rates of 4.3 percent for 10-year U.S. Treasuries and 10.5 percent for corporate high- yield, high-risk debt, according to indexes compiled by Merrill Lynch & Co.
Investors began abandoning the auction-rate market in February on concerns that companies insuring the bonds wouldn’t meet their obligations in cases of default. Municipalities, hospitals and universities have been unable to raise money, while some holders are stuck with bonds they no longer want. Still, 29 percent of auctions were successful last month as investors locked in yields they couldn’t get for other assets.
“We’re buying it for every client that will allow us to buy it for them,” said Matt Dalton, chief executive officer of White Plains, New York-based Belle Haven Investments Inc. “We think it’s an opportunity that’s not going to last forever.”
Auction-rate bonds allow issuers to sell debt maturing in 20 years or longer at short-term rates that reset every 7, 28 or 35 days through bidding arranged by Wall Street banks. Many brokers peddled the debt to investors as a higher-yielding alternative to money-market funds.
I’ve talked about the auction-rate market before, and mentioned that it was in serious trouble, but in the last couple weeks the market has all but disintegrated. This is serious news indeed. It was basically a shell game for local and state governments to sell their bonds as short-term debt rather than long-term. The governments were able to raise more money, and investors got a better rate of return on it. But the downside was that if the auction rates went south, the governments issuing the bonds would be stuck at the maximum interest rates.
Nobody was buying this debt because of the default risk. The main buyers of these short-term bonds were in fact financials…the same financials that have written off $250 billion so far in losses. They can no longer afford to buy these, and as such, the entire market has collapsed because no buyers have stepped in.
As a result, these government entities are now stuck with bond rates with double digits, and the market for these bonds has all but completely evaporated.
Billions in municipal and state bond issues are now trapped at usurious interest rates, and taxpayers are going to have to foot the bill on them. This is money that’s going to be coming out of your pocket when these governments raise taxes and slash services to cover the interest on these bonds.
The auction-rate market is now all but dead. $330 billion in damages need to be added to the butcher’s bill for the housing depression and the bubble men and women behind it. The damages keep growing.
Meanwhile, more trouble for the financials overall, this time Wachovia is taking a major bath.
Wachovia, the fifth largest US bank by market value, confirmed on Monday it planned to raise $7bn in capital through a public offering as it slashed its dividend and slumped to a first quarter loss.
The bank also made a $2.8bn provision to cover losses on mortgage-related investments.
Ken Thompson, Wachovia’s chief executive officer, blamed higher credit costs and continued disruption in capital markets for a $350m, or $0.20 a share, first quarter loss compared with a profit of $2.3bn or $1.20 a share in the first quarter of last year. Analysts surveyed by Thomson Financial had expected Wachovia to earn 40 cents per share.
Shares in Wachovia fell 12 per cent to $24.48 in pre-market trading.
Lowering the dividend by 41 per cent to 37.5 cents would save $2bn a year, the company said in its results statement on Monday.
“I’m deeply disappointed with our first quarter results, but I am confident we’re taking prudent and appropriate actions in this challenging period to restore Wachovia to a more profitable path,” said Mr Thompson.
It’s the news that Wachovia is scrambling to continue to raise new capital that should concern people. Banks continue to grab cash from the Fed Window and still need to raise billions in new offerings?
Just how much money are these banks continuing to lose on a weekly basis? The Fed continues to pour money out of that discount window (Another $150 billion went out the door with the average balance of $35 billion last week!) and the Fed is basically bailing out these banks as they continue to hemorrhage out cash.
This cannot keep up for long. Retail sales in the US rose in March only because of higher gas prices.
Retail sales in the U.S. rose in March, reflecting increases in receipts at service stations as gasoline prices jumped.
Purchases rose 0.2 percent last month after a 0.4 percent decline in February, the Commerce Department said. The median forecast of economists surveyed by Bloomberg News projected no change. Purchases excluding gasoline were unchanged last month after falling 0.3 percent.
Spending, which accounts for more than two-thirds of the economy, is waning as consumers pay well over $3 a gallon for gasoline just as their jobs are in jeopardy and their homes lose value. Investors are betting the Federal Reserve will need to lower interest rates again to shore up confidence.
“Spending is pretty sluggish,” said Kevin Logan, senior market economist at Dresdner Kleinwort in New York, who correctly forecast the sales figure less autos. “If you’re getting an inflationary increase in gasoline and food, that would mask the true weakness in consumer spending. This is consistent with recessionary conditions.”
As more and more dominoes continue to fall, the economy will grind out to a halt. The major problems in the economy may be glossed over by the news, but they’re still out there. When they do explode, they will cause trillions in damage.
Be prepared.