Saw a leaflet in the FT today. Can't find it on the website, but found this

http://www.lloydsbankinggroup.com/media1/research/qtrly_regional_comments.asp

Interesting to see that Greater London is already 25% off peak

Was ~320k (this figure has been adjusted)

http://www.noelwatson.com/blog/PermaLink,guid,f6aea8d2-ce5c-42d4-8d20-90fd4d636840.aspx

(rows 1285 on 2nd and 3rd tabs)

http://www.lloydsbankinggroup.com/media/excel/24_04_09historicdata.xls

Now £241,306

http://www.lloydsbankinggroup.com/media/pdfs/research/GreaterLondonQ12009.pdf

Wikipedia page

http://en.wikipedia.org/wiki/Eric_Rosenfeld

Good read

http://www.amazon.co.uk/When-Genius-Failed-Capital-Management/dp/1841155047/ref=sr_1_1?ie=UTF8&s=books&qid=1240932983&sr=8-1

I have mentioned before that there is a link between mortgage approvals and house prices six months from now

http://www.houseprices.uk.net/articles/house_price_predictor/

and I thought I would look at when approvals started heading south

BBA:

BOE

In July 2007, both BBA and BOE approvals dropped dramtically. That is not to say that they wouldn't pick up again, but couple this with the Goldman hedge fund

http://business.timesonline.co.uk/tol/business/industry_sectors/article2253691.ece

and the XOver breaking through 500

http://www.noelwatson.com/blog/PermaLink,guid,3a000888-e5df-4208-9515-01586f6332f2.aspx

indicated that as was not well. Did we know then that things were going to be as bas as they are? Probably not - see my comments on whether the XOver would break through 1000.

UK GDP numbers are released in theory a total of three times for a given quarter. For Q4 we have

23/01/2009: Advance

25/02/3009: Preliminary

27/03/2009: Final

Q3 final number (23/12/2008) was -0.6% (revised down from -0.5% (P)), and has subsequently been revised down to -0.7%

Today's Q4 preliminary number was unchanged at -1.5%

Looking at the bigger picture, things aren't quite as bad as the 90s recession. Yet.

http://www.ft.com/cms/s/0/47931550-f874-11dd-aae8-000077b07658.html

Reading this article, I was wondering whether the two statements
"Even under what seem like extreme scenarios for UK and US house prices, many people agree that few mortgage bonds outside subprime definitely look expensive. "
"Also, for example, Fitch Ratings recently said that under its stress testing, which included the assumption of a 30 per cent fall in house prices, no mortgage bond rated triple A in the UK would see a downgrade."
are linked. In particular, is 30% fall in house prices considered to be an extreme scenario?  I belive the 30% reflects a peak to trough estimate

http://www.ft.com/cms/s/0/8305276e-ebdf-11dd-8838-0000779fd2ac.html

yet when the derivatives market are pricing in 46% peak to trough,

http://www.tfspropertyderivatives.com/pdf/RISK&MANAGE/2009/Feb-09.pdf

30% seems very optimistic.

http://www.ft.com/cms/s/0/fb6d3b8c-f8a6-11dd-aae8-000077b07658.html

"The world's most highly rated countries have for the first time been put into different categories reflecting their risks for credit downgrades, in a sign of the deepening financial crisis."

Reuters have done a little diagram

http://uk.reuters.com/article/UK_COMKTNEWS_MORE/idUKLB77042220090212

It appears that the UK is not best placed after all. Quelle surprise!

"Law firms offering graduates a median starting salary of £37,000 a year remained the highest payers. Investment banks were in second place, offering £35,000.

In third place, at £28,000 a year, were the business and financial services sectors"

http://www.ft.com/cms/s/0/53e54c1e-f0af-11dd-972c-0000779fd2ac.html

"Gordon Brown was on Sunday night accused of having “learnt nothing” from the economic crisis after he defended unorthodox mortgage loans worth 125 per cent of the value of a home.

After he was pressed on whether he should “shoulder the blame” for lax lending practices, Mr Brown insisted “high percentage mortgages” were fine as long as interest rates were low"

Astonishing that he believes this.

http://www.noelwatson.com/blog/PermaLink,guid,bc024a3b-6d2a-4ea1-bd0e-052811080655.aspx

http://www.bloomberg.com/apps/news?pid=20601085&sid=aYgTyVZ.8T.A&refer=europe

Nothing unusual in that, but prior to this, NOKIA was a company that had CDS issued, but no debt outstanding

http://www.noelwatson.com/blog/PermaLink,guid,1bd7fe10-3b83-4e76-abc0-2e85b40483d5.aspx

I was reading this

http://www.ft.com/cms/s/0/417d0086-ee6f-11dd-b791-0000779fd2ac.html

written by (I believe)

http://belfercenter.ksg.harvard.edu/experts/875/david_richards.html

and at first I was angry at the fact that the FT had allowed such drivel to be posted, but I guess they can't be experts on every letter that is published. I posted this article in the FT Long Room

http://ftalphaville.ft.com/longroom/

to check that it wasn't just me that had these thoughts. Everyone there agreed that it was tosh. However, before I continue, I must say that I have an obvious bias as I work in the industry. Onto the letter...

Only if the rest of the market agreed with you, but what do you gain over shorting the share. Furthermore, is there a 100% correlation between the credit and equity markets?

Credit lagging

http://www.noelwatson.com/blog/PermaLink,guid,97625e8e-abff-4934-846b-74e07d785307.aspx

or leading?

http://www.noelwatson.com/blog/PermaLink,guid,6ff32223-b54c-4ac6-b1e3-6baf7d232c07.aspx

I'm sure David has the answer!

“On the other hand, if I were the US government, and had understood Mr Soros’s analysis, I could have stopped the Lehman bear raid in its tracks. When Lehman came under pressure, the US government should have entered the systemically important credit default swap market that AIG had vacated, and begun aggressive writing of credit default swaps on Lehman securities”

Assuming there was such a thing as a Lehman bear raid, the U.S. Government decided to let Lehman fail, so the decision had already been made.

http://www.irishtimes.com/newspaper/finance/2008/0916/1221430252353.html

The author is implying that the U.S. were unable to save them. AIG has so far drawn $90.3 billion from an emergency loan,

http://en.wikipedia.org/wiki/American_International_Group

"On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG may draw up to $85 billion. The loan is collateralized by the assets of AIG, including its non-regulated subsidiaries and the stock of "substantially all" its regulated subsidiaries, and has an interest rate of 850 basis points over the three-month London Interbank Offered Rate (LIBOR) (i.e., LIBOR plus 8.5%). In exchange for the credit facility, the U.S. government will receive warrants for a 79.9 percent equity stake in AIG, and has the right to suspend the payment of dividends to AIG common and preferred shareholders.[1][4] The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.[4][24][25] AIG's board of directors announced approval of the loan transaction in a press release the same day. The announcement did not comment on the issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing of September 18, 2008, reporting the transaction to the Securities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve.[26][5][1] AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008.[27] On September 22, 2008, AIG was officially removed from the Dow Jones Industrial Average.[28] An additional $37.8 billion loan was extended in October. As of October 24, AIG has drawn a total of $90.3 billion from the emergency loan, of a total $122.8 billion"

so I can't see why the Fed couldn't have done something similar with Lehman, if it had chosen to do so.

AIG weren’t writing protection on the single name market, as far as I am aware, so I am not sure why that was mentioned. It was writing super senior tranche protection on synthetic corporate CDOs, one of the reasons it wasn't allowed to go under

http://www.noelwatson.com/blog/PermaLink,guid,19e80fd2-0f61-4650-8afe-142458df673b.aspx

As we have seen with the ban on short selling in the UK, creating false markets (in this case by selling CDS protection) this doesn’t fix underlying the problem. False markets are not a good thing (see also Government providing mortgage payments on UK properties http://www.ft.com/cms/s/0/80b2e400-e1db-11dd-afa0-0000779fd2ac.html) , they just prolong the pain.

With its unlimited balance sheet and no requirement to put up collateral, the government could have prevented the price of Lehman credit default swaps from, as Mr Soros writes, “going though the roof"

Did Lehman spreads go through the roof?

They did gap out, but what is David proposing, that we ban CDS from reflecting what the market believes is a company's chance of defaulting? Has he any evidence that spreads widening is self fulfilling?

http://0-ftalphaville.ft.com.innopac.up.ac.za/blog/2009/01/06/50811/glencore-time-to-come-clean/

Is there smoke without fire?

http://www.noelwatson.com/blog/PermaLink,guid,38ea0de9-82a7-488c-8c2a-5cdd2f0928dc.aspx

The government could have prevented financial meltdown

By preventing ultra low interest rates, and the Greenspan put, and Clinton not encouraging people to buy a house they couldn't afford, then yes,

but by selling CDS protection on Lehman, I doubt it!

Credit default swaps, in massive quantities, are still out there and still causing havoc

Vague hysterical sentences are meaningless, unfortunately. The CDS market survived a massive shock when Lehman went under.

“Even though no organisation of consequence is now writing credit default swaps, the exorbitant prices of "marks" on them still govern accountants’ (“fair value”) pricing of bonds and, in turn, regulatory capital requirements”

So the CDS market is acting as an efficient price discovery mechanism – is this a bad thing?

The Government has discussed trade credit insurance, not writing CDS

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/01/insurance_that_worsens_crunch.html

“If the authorities had understood the Soros analysis several years ago, and unattached credit default swaps had been banned, the credit bubble and bust would never have occurred.”
 

See my comments above. The securitization market (not plain corporate CDS) may have accentuated the boom, but policy mistakes started it

In the FT today

http://www.ft.com/cms/s/0/61c23b40-ee42-11dd-b791-0000779fd2ac.html

and the reponse on FT alphaville

I attempted an implementation of this a while back

http://www.noelwatson.com/blog/PermaLink,guid,fa4d8579-f754-48e0-a485-dc7c6850405f.aspx

Originally posted here

http://www.noelwatson.com/blog/PermaLink,guid,27af9f1a-63b5-4e47-88a9-59d03ed7f90d.aspx

HYP capital is now underperforming by around 5%. Note that this is a simplication as it doesn't take into account

• RBS rights issue
• UU return of capital

http://www.unitedutilities.com/FAQsROC.htm

http://www.bloomberg.com/apps/news?pid=20601009&sid=aLCNBJIsERKs&refer=bond

ALLX SPCD

After Spain gets threatened with downgrade

http://www.telegraph.co.uk/finance/4224453/SandP-threatens-to-strip-Spain-of-top-AAA-rating.html

and then downgraded just over a week later

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4292055/SandP-strips-Spain-of-its-AAA-credit-rating.html

I was wondering why the UK hadn't also been downgraded. The gradual nationalising of the banks is going to potentially give us large problems in years to come

"Assume the state takes ultimate responsibility for all of Britain’s banks. Further, assume that 15 per cent of those banks’ assets are worth nothing. The write-off would be equivalent to about £600bn or a third of GDP. Britain’s debt to GDP ratio is about 54 per cent; add in these and other bail-out costs and the ratio could easily double. That would make the UK comparable to Belgium, Greece and Italy – none of which, as Merrill Lynch notes, has a triple A credit rating"

especially when I read this

http://www.ft.com/cms/s/0/a5c6bfe2-e67b-11dd-8e4f-0000779fd2ac.html

For taxpayers, the prospect of taking on this risk may seem alarming. However, officials stress that the government is planning to insure only against extreme scenarios in which the bulk of a large pool of loans goes bad. That is similar to insurance bought by companies seeking to protect themselves against the remote possibility of being hit by a hurricane or an earthquake.

BLACK SWAN ALERT!

Looking at the CDS market (10Y, Spain and UK have been trading pretty much in line over the last few months, only over the last few days has Spain moved wider after the downgrade

My fantasy portfolio  buy of UK 5Y @67 is looking good

http://www.noelwatson.com/blog/PermaLink,guid,0c5c8ee2-cafe-4a5f-9f55-e0a0af90dc9e.aspx

I think it is only a matter of time before S&P put the UK on rating watch

EDIT: Forget to include the FT weather map

http://www.ft.com/cms/s/0/d99064aa-e65c-11dd-8e4f-0000779fd2ac.html

UPDATE:

Talking of tail risk, I wonder if the Government have taken this into account

http://online.wsj.com/article/SB123241510486096355.html

Analyst reports issued by Morgan Stanley and Royal Bank of Scotland Group PLC last week each said derivatives were pricing a peak-to-trough fall of 45% in U.K. house prices from August 2007 to the end of 2010. RBS's estimated that such a substantial fall would put 60% of HBOS's mortgage book into negative equity, more than half on Lloyds TSB's books and more than a third at Barclays PLC and RBS. HBOS and Lloyds this week merged into Lloyds Banking Group PLC.

UPDATE 2:

Couple of articles in weekend FT

#1

http://www.ft.com/cms/s/0/41827e52-e9bb-11dd-9535-0000779fd2ac.html

"He also points out that in previous emerging market currency crises - Argentina in 2002, Russia in 1998 and Indonesia in 1997/8 - wholesale selling of bank shares quickly translated into wholesale selling of the country itself. Unlike those countries, of course, the vast majority of UK debt is sterling denominated.

However, that could quickly change if RBS were nationalised. Morgan Stanley thinks half or more of RBS's £1,700bn of liabilities could be denominated in currencies other than sterling."

#2

http://www.ft.com/cms/s/0/92011204-e988-11dd-9535-0000779fd2ac.html

But the prime minister cannot be so definitive on Britain having no possibility of defaulting. After all, the country has form.

As Kenneth Rogoff and Carmen Reinhart have documented in their history of sovereign defaults, England’s monarchs regularly refused to pay their debts. Edward III defaulted on debt to Italian lenders in 1340 after a failed invasion of France that set off the 100 years war. Henry VIII seized the Roman Catholic Church’s lands. “While not strictly a bond default, such seizures, often accompanied by executions, qualify as reneging on financial obligations,” professors Rogoff and Reinhart observe drily.

England defaulted in 1672 in the “Stop of the Exchequer” and, in the last century, Britain in effect defaulted in 1932 in a “voluntary” reduction on the interest it paid on war loans.

http://www.publicpolicy.umd.edu/news/This_Time_Is_Different_04_16_2008%20REISSUE.pdf

Was having this discussion on a forum a few days ago, so thought I would have a look back at when the UK last had big inflation to see how this strategy would fare.

Scenario:

It is the end of 1973. The average house price is £9,767 and increasing at 24% per annum. You are worried about inflation and think that property is the best hedge over the next two years. You have a 20k deposit and buy a £100k place. You secure at 2% over base (which averages 11.4% over the period in question)

Property:

Property gains 13.5% over two year period, so you make 13.5k capital gain. The funding costs are around 21.5k, income from rent around 14k, and maintenance/voids/transaction costs around 4k, meaning that you make £10034

Cash:

Assuming you get 2% under base on your 20k savings, you make £3760

Shares:

The FTSE All share started the period at 149.8 and finished at 160.52. I estimate the yield to be 5% giving a return of £3335

Gold:

Gold (denominated in GBP) went from 45.95 to 69.31, giving a return of £6740

So, in this sample size of one, and for this time period, it would appear that property was the best investment. However, a lot of the returns are dependent on rental yield, and if you look at the chart below in the renting section, you will see that yields are massively lower than they were in the 1970s, and housing much more overvalued. So maybe now is not the best time to be looking at this, but in two years time, who knows.......

References:

House prices:

http://www.nationwide.co.uk/hpi/downloads/UK_house_price_since_1952.xls

Rental yield:

http://www.nationwide.co.uk/hpi/historical/Dec_2008.pdf

http://www.ntu.ac.uk/research/school_research/nbs/overview/working_papers/59876.pdf

Base Rate:

FTSE All Share:

http://www.thisislondon.co.uk/standard-business/article-23569535-details/It's+got+so+bad+that+even+the+bears+are+buying/article.do

" From its low point of 146 on 5 January, 1975, the FT 30 share index doubled in six weeks. Well, that was then. As Bolton should also know, that index had fallen by two-thirds from its 1972 peak, and the dividend yield on the All-share index was 10%."

Gold:

RPI:

UPDATE:

After feedback, have decided that ignoring the cost of renting is over simplification, so have added estimated yield from renting the property.

Calculations:

PropertyasInflationHedgeCalcs.xls (17.5 KB)

Halifax in their latest press statement state

“The house price to earnings ratio – a key affordability measure - is at its lowest for five and a half years.  The house price to average earnings ratio has decreased to an estimated 4.44 in December 2008 from a peak of 5.84 in July 2007. The ratio is at its lowest level for over five and a half years (April 2003: 4.44). The long-term average is 4.0.”

There are two things that interest me here. Firstly, where does the average earnings number come from. Secondly, is the long term average 4.

From the report, the average (SA) house price is now £159,866, and the NSA price is 158,437 (AllMon(NSA))

 The earnings comes from the ASHE

"3.  PRICE/EARNINGS RATIO
Ratio of the Halifax standardised average price to national average earnings for full-time male employees. Price Earnings ratios revised to reflect new data in the Annual Survey of Hours and Earnings (ASHE). "

So, £159,866/4.44 gives average earnings of £36,005, and £158,437/4.44 gives £35864

The AHSE data is here

http://www.statistics.gov.uk/downloads/theme_labour/ASHE_2008/tab7_7a.xls

and it can be seen that the mean salary for a male full time employee (tab "Male Full-Time") is between 35 and 36k

I believe the value they are using is the value for Great Britain, as a prior report

states that the mean salary is £31.5k, which corresponds to the 2008 survey for mean earnings for full time employees (Full-Time, cell F7)

so if we use the NSA number, and the value for the whole of GB, we get £158,437/£35,356. This gives a value of 4.48, so not quite 4.44, but not far off.

Comparing this with April 2003 numbers. The average NSA house price was £128,280

http://www.hbosplc.com/economy/includes/02_01_2009HistoricData.xls

and earnings £27,829

http://www.statistics.gov.uk/downloads/theme_labour/ASHE_2002/tab1_7a.xls

(I took 2002 as I don't think the 2003 numbers were out in time) giving a ratio of 4.61. So I'm not sure exactly why my numbers don't tie up.  However, the question I have is

• Why is the mean number being used rather than the median?
• Why are they using male only?
• Have they always used this criteria?

Nationwide appear to use different criteria

they are showing average PE still above 5.5

Next, looking at the long term average. Halifax claim that it is 4.0. The affordability data can be downloaded from here

http://www.hbosplc.com/economy/includes/23_10_08affordability.xls

here they appear to use the earnings for male and female, and the peak here was 5.98 (on a quarterly basis). The average is shown as 4.07. However, as with the Nationwide trend of 2.9%

http://www.noelwatson.com/blog/PermaLink,guid,31834980-ddd9-4df0-a2af-60d1ebfac038.aspx

I believe that this has been skewed by the bubble since the turn of the decade. Take this out and the average is 3.68. This compares with a value at the end of Q3 2008 of 5.02, and a minimum of 3.09, which occurred after the last bust. Will we see the ratio fall below 3?