Posts Tagged ‘Treasuries’

Warren Buffet Bullish on U.S. Credit Rating

Monday, August 22nd, 2011

Standard & Poor’s may have downgraded the United States credit rating from AAA to AA+ and the bears may have taken over Wall Street, but the Berkshire Hathaway chairman and billionaire Warren Buffett believes that the nation deserves a AAAA rating.

In a recent appearance on CNBC, Buffett said that he still believes that the United States’ debt is AAA and that he’s not changing his mind about Treasuries based on Standard & Poor’s downgrade.  “If anything, it may change my opinion on S&P,” according to the Oracle of Omaha.  “I wouldn’t dream of putting it anywhere else,” Buffett said, noting that at Berkshire, the only reason he’s sold Treasuries in the past is to purchase stocks or make acquisitions.  Berkshire is still buying T-bills, even though yields have declined.  “If I have to buy (Treasuries) at a zero percent yield, I will,” he said.  “I don’t like it, but we’ll do it.”

Buffett has something of a vested interest in criticizing Standard & Poor’s.  Berkshire Hathaway is one of the biggest shareholders in Standard & Poor’s main competitor Moody’s with about 28 million shares. But the billionaire has long urged people to make their own decisions about an investment’s prospects without relying on credit rating agencies.  Buffett said the action doesn’t change his view on the soundness of U.S. Treasury bills.  At least $40 billion of Berkshire Hathaway’s approximately $48 billion cash and equivalents is in U.S. Treasury bills, and Buffett won’t consider investing it elsewhere.

According to Buffett, America’s leaders may have a difficult time agreeing on the country’s financial future and the value of the dollar may slide, but that won’t keep the world’s richest nation from paying its debts.  The United States has a GDP of about $48,000 per person, and the Federal Reserve can always print more money.  “Our currency is not AAA, and in recent months the performance of our government has not been AAA, but our debt is AAA,” Buffett said.

Writing on the InvestorPlace.com website, Jeff Reeves says that “Before you scoff that Buffett is just a bygone relic of an era during which stocks like General Electric truly did have bulletproof dividends and it would have been unfathomable for stocks like General Motors to go bankrupt, consider this: In September 2008, the depths of the financial crisis when nobody knew which bank would fail next, Buffett and Berkshire dumped $5 billion into preferred stock of Goldman Sachs.  Thanks to the 10 percent interest on those shares, Berkshire Hathaway earned a cool $500 million per year in dividends before Goldman bought back the stock several months ago.  What’s more, the investment bank paid a hefty 10 percent premium to buy back those preferred shares.  Maybe it was crazy to jump into banks headfirst when the market was going haywire in 2008.  But it was awfully profitable for Buffett.  You might think it’s crazy to stick to your buy-and-hold strategy now, or to continue to rely on U.S. Treasury Bonds.  But take a deep breath and remember that not everyone is screaming and running for the hills.  Yes, persistent problems with unemployment, the political bickering in Congress and the flatlining of our American economy are serious issues.  But they are hardly new.”

Not everyone agrees with Buffett.  According to the Equity Master website, “We must say that we do not agree with Mr. Buffett.  We are not arguing with the credibility of S&P, whose reputation admittedly became tainted when it gave the highest rating to many mortgaged backed securities in the months leading up to the demise of Lehman.  But that does not mean that the U.S. is without some serious problems.  Indeed, the U.S.’ mounting debt is a huge cause for concern and the government’s latest move to raise the debt ceiling is only likely to postpone an eventual default and not entirely extinguish it.  Moreover, the claim that the U.S. can pay its debt because it can print more money is a dangerous one to make.  Printing money never really solved America’s problems.  The two big quantitative easing programs and their failure to revive the sagging U.S. economy is testimonial to the fact.  One thing that it will certainly do is bring down the value of the dollar and cause inflation to accelerate posing a fresh set of problems for the U.S.  So, while criticisms can be piled on S&P, downgrading of the U.S.’ credit rating is something that the world’s largest economy had a long time coming.”

Firstpost agrees that Buffett is wrong.  “Among other things, he said that the U.S. deserved a AAA credit rating when the S&P decided to bring it down to AA+. He also believes the U.S. will avert a double-dip recession.  Well, Mr. Buffett, you are already half-wrong. A slow-growing nation with a 100 percent debt-to-GDP ratio cannot be AAA by any stretch of economic logic.  It makes India’s 70-72 percent debt-GDP ratio look like the epitome of prudence.  As for the other half of your prediction – that the U.S. will avoid a double-dip recession – the jury is out on that one, but the recession wasn’t the reason for the S&P downgrade anyway.  There are two reasons, or maybe three, why the U.S. is in a mess.  One is that it is overleveraged – in deep debt – both at the level of government and the common people.  Two, the law that the U.S. can indefinitely live beyond its means has a flaw.  It was built on the assumption that dollar debts can be paid off by printing more of the green stuff forever.”

Foreclosed Homes Total a Three-Year Supply

Tuesday, June 14th, 2011

The current national inventory of foreclosed homes represents a three-year supply, according to RealtyTrac.  Not surprisingly, that is depressing home prices.  “This is very bad for the economy,” said Rick Sharga, a RealtyTrac spokesman.

In Las Vegas, the foreclosure situation is so dire that more than half of all homes sold in Nevada are foreclosures.  In California and Arizona, 45 percent of sales are foreclosures; that totals 28 percent of all existing home sales during the 1st quarter of 2011.

Additionally, the nation’s stock of foreclosed homes are selling at deep discounts, particularly REOS, which are bank-owned homes.  The typical REO sold for about 35 percent less than comparable properties, according to RealtyTrac.  In some areas, the discounts were ever steeper: In New York, the discount for REOs was 53 percent during the 1st quarter and almost 50 percent in Illinois, Ohio, and Wisconsin.

“Short sales,” homes where the selling price is less than what is owed by the borrowers, are also dragging down the market.  These sell for an average nine percent discount.  When you consider both REOs and short sales, Ohio had the biggest discount of any state, at 41 percent.

During the 1st quarter, there were 158,000 sales involving distressed properties nationally, less than half the nearly 350,000 during the same period of 2009.  With the slower pace of sales, it will take three years to sell off the inventory of 1.9 million distressed properties, according to Sharga.  “Even if you look at REOs alone, it will take 24 months to clear them and that’s without any new foreclosures at all coming into the system,” he said.

RealtyTrac found that the average sales price of properties in some stage of foreclosure, scheduled for auction or bank-owned — was $168,321, down 1.89 percent from the 4th quarter of 2010.

A total of 158,434 bank-owned homes and those in some stage of foreclosure were purchased during the 1st quarter, a 16 percent decline from the 4th quarter of last year and down 36 percent from the 1st quarter 2010 total.  Bank-owned properties that sold in the 1st quarter had been repossessed an average of 176 days before the sale, while properties that sold in earlier stages of foreclosure in the 1st quarter were in foreclosure an average of 228 days before they were sold.  According to James J. Saccacio, chief executive officer of RealtyTrac, “While this is probably helping to keep home prices relatively stable, it is also delaying the housing recovery.  At the first quarter foreclosure sales pace, it would take exactly three years to clear the current inventory of 1.9 million properties already on the banks’ books, or in foreclosure.”

Foreclosures are particularly attractive to all-cash buyers who demand discounts,  pushing down the value of all properties.  More than 75 percent of American cities experienced price declines in the 1st quarter.  Bank-owned homes totaled 107,143 sales in the 1st quarter, down 11 percent from the 4th quarter and almost 30 percent from 2010.  Sales of homes in default or scheduled for auction totaled 51,291, a 26 percent decline, according to RealtyTrac.  That was less than half the peak of 348,629 distressed deals in the 1st quarter of 2009.

Writing on the website 24/7wallstreet.com,  Douglas A. McIntyer offers an interesting perspective.  “Any economist will say that when some homes are sold at 27 percent below the normal market, all home prices will be pulled lower.  That may be the key to the home market recovery.  Foreclosure inventory will continue to rise as banks put more backlogged homes onto the market.  The glut will probably push down the average of all homes by several percent. This may be a reason home prices are predicted to fall another 10 percent this year.  Buyers will not come back to the housing market until they believe that prices are too good to resist.  That may mean homes that sold for $500,000 in 2005 will have to sell for $300,000 next year.  Prices will not be driven down quickly without the reduction in inventory of foreclosed homes.  There has to be a bottom to prices.  The sooner it is found the better.  The housing market is more than half dead.  The only tonic is a belief by buyers that prices are so remarkably low that new buyers will make money on a house and not lose it.  If the housing market is to continue to drop, the drop needs to be swift.  Mortgage rates are near all-time lows.  Inflation and concerns about the value of Treasuries due to the U.S. national deficit could change that.  Home prices that are viewed as affordable need to be married with low mortgage rates for the market to catch fire.”

Economic Recovery Picking Up Steam

Monday, January 17th, 2011

Economic Recovery Picking Up SteamTreasuries were little changed after the minutes of the Federal Reserve’s last meeting confirmed that policymakers believe that economic growth is gaining traction.   Fed officials, however, believe that the economic gains were “not sufficient” to curtail their plans to buy $600 billion in U.S. debt to encourage employment in a stimulus strategy called quantitative easing (QE2 for those with a sense of humor).

“In general, Fed policymakers think the economic recovery is gaining a little bit of momentum, although the pace is a little bit slow,” said Alex Li, a New York-based interest-rate strategist at Deutsche Bank AG.  “There are certainly some concerns about the economy gaining momentum — concerns from Treasury investors.  That added a bearish tone to the Treasuries market.”

Five-year note yields rose one basis point, or 0.01 percentage point, to 2.01 percent in New York, according to BGCantor Market Data.  Ten-year note yields were slightly changed at 3.33 percent after rising to 3.37 percent.  “The Fed will have to see good growth for more than a one- or two-month period to alter their views on QE2,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “They have a high threshold.”

The nation added 140,000 jobs in December, after a rise of 39,000 in November, according to the median forecast in a Bloomberg News survey of 74 economists.  Orders at American manufacturers unexpectedly rose 0.7 percent in November, after falling 0.9 percent in October, according to data from the Commerce Department.

The $858 billion bill that President Barack Obama signed December 17 extending tax cuts for two years prompted speculation that federal borrowing needs to stay stable or increase.

The Fed is buying U.S. debt every day this week in the quantitative easing program.  In fact, it purchased $1.62 billion worth of Treasury Inflation Protected Securities that mature between July of 2012 and February of 2040.