The secondary insurance market ‘settlements’

Often you hear about a ‘secondary market‘ and often it is related to bonds, in particular the likes of TBills (Tbills are US Government bonds that run less than 12 months, TNotes on the other hand run longer than a year). What this means is that there is a market which operates outside of the primary market – where the transaction first takes place. In the treasury realm (the likes of Tbills) the primary market is from the Government to the buyer – either institutional or private – and the secondary market is between (for instance) one private individual and another. Why does it exist? Simply because the maturity date on the bond may not suit the holder, so private individual A will sell to B rather than wait until the time the bond matures.

A Secondary market exists in many other areas too, one example is that of Life Assurance. There are companies …

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Some past market performance figures

Naturally past economic cycles don’t tell us exactly what will happen in the future, but as Mark Twain once said ‘history doesn’t repeat itself but it does rhyme’. And for that reason it is worth looking at some key figures from the past, showing that often the gains in bull markets are all found at the cusp of a bear market.

The stock market generally reacts before consumers and the real economy do and equally it will generally see recovery before them as well. Taking a view of the 20th century markets we can see the following:

In the recession of 1926 to 1927 the market increased by 41%. The years of 1933 to 1937 saw some of the most impressive gains ever in the S&P 500. The eight month recession of 1945 saw markets rise 19.5%, the eleven month recession of 1948-49 saw the markets go up 15.2%. Again in 1953-1954 the ten month recession ended with a market that rose 24.2%.

Any reader will note that much of these ‘gains’ did …

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Housing dysfunction

There are some who are saying that there are amazing deals to be found in the current market and if you consider price only then you may be tempted to believe this. Yields could also present a strong argument for property investment if yields stay at historic levels, however yields are likely to fall in 2009 and will remain stagnant until at least 2011/12 for several reasons which we will outline, we will also look at some of the current dysfunction in the market by examining a few types of sellers and how their personal situations express themselves in their selling behaviour.

The first group bought in the last days of the boom, they likely used minimal deposits (or even 100% finance) in order to purchase and they are in deep negative equity, they are now no longer on fixed rates – which tended to be 1/2/3yr fixed- and may have moved into the variable market which revises their payments upwards. One can be forgiven for thinking they may be a ‘distressed seller’ – the distress …

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First Active set to close.

It was announced yesterday that First Active is going to close operations in Ireland. This will start with 750 job losses coming into effect via voluntary redundancies, 550 of which will be in the Republic. Unions in Ulsterbank/First Active have said that bank workers are ‘scapegoats’, we spoke about the coming job losses in April of 2008 here.

RBS have made record losses, this lead to their bailout by the UK government. On the ground here it means that at 45 locations First Active will merge with Ulsterbank branches. The removal of First Active from the market will mean there is less competition in Irish lending, this will set the basis for increased margins on lending – at a time when the ECB is dropping rates. Having said that, First Active and Ulsterbank prices are amongst the most expensive in the market with variable rates of over 6% when market leading rates are under 4%.

In …

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Beware the Contract/Valuation trap

Our firm has seen a rise in what we describe as the Contract/Valuation trap, so we will tell you what it is and how to avoid it as well as steps you can take should you find yourself in this position. The contract-valuation trap is one that occurs when the price of a property being purchased drops significantly between the time the contract is signed and the property is closed. All lending is generally based on LTV (loan to value – see our jargon page for a description of that), however, a valuation which sets the market price in the banks eyes is what the loan is based on, it is not based on what a person was willing to pay for it and this helps to give an independent opinion of the worth of a property.

Another issue is that in a falling market sellers become more ‘motivated’ and by that we mean that they will more readily accept a lower than asking price offer, …

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How to rescue the financial system

I found this clip today, it is talking about some of the issues I mentioned in the post ‘Survival of the Weakest’ and it talks about the need to save healthy banks in favour of saving weaker banks. The common sense approach would be that you don’t privatise profits and socialise all losses and that you focus on saving firms (albeit banks) that are entities worth saving to begin with.

“A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him” – John Maynard Keynes.

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Generic overview of the market 2009: by sector

I was asked by a colleague in the UK to provide an overview of the Irish mortgage market, he has often advised the Bank of England in the past on the UK buy to let market, however this time it is in relation to a talk he was due to give to an international financial services group on the Irish economy. Below are the contents of my correspondence which is a no holds barred view of the mortgage market in 2009.

Remortgage: This area is finally starting to see some life again, the rate drops are filtering through and many of the people on fixed rates taken out in 2005/2006/2007  are shopping around, as always new business attracts better rates than existing customers so there is once again an argument for switching.

However, the many people who took out trackers are basically out of the market in the long term as every single lender has removed tracker mortgages from the market, in fact, if you know of a lender willing …

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Bill Gross of Pimco talks about the deficit in the USA

Bill Gross, known as ‘Mr. Bond’ runs the largest bond fund in the world, in this video he talks about many of the issues facing the economy under the new Obama presidency. Bill Gross is a fascinating character who started his careers as a professional gambler I always enjoy listening to his views on the market which he does with an intersting mix of macro/micro/common sense views.

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New trends in underwriting and credit

It is 2009 and one of the things we need to look at (at least from the mortgage market perspective) is the availability of credit. Many associations such as ISME and politicians such as Joan Burton have voiced strong opinion on the need for credit to be extended to small businesses. The same credit contraction is happening in lending for property.

While our firm, and almost everybody involved in the mortgage market accept that we are not at market clearing levels, the unavailability of credit for those who do wish to buy and are capable repaying their loans is going to cause an unnecessary distortion which will drive prices down further than is rational. Without getting too deeply into the reason for the credit contraction/deleveraging process which we have covered many times here before, the point of interest is the new brand of underwriting we are likely to see.

In the past people within the financial industry were looked upon favourably, not only due to the fact that they normally represented a …

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What stimulus is there after a 0% rate?

There are generally two strands to monetary stimulus, firstly there are interest rates, and then there is the actual money supply. We’ll talk about both of them here and what will mean for consumers.

Interest rate drops drive money into an economy in a few different ways, obvious to most is that the cost of borrowing comes down, so if a company has to borrow to hire people they can do so, people need less to service debts which increases their disposable income and that puts more money into circulation. The other thing that happens is that bank deposits look less attractive, interest rates dropping actually cause rate compression, something we discussed here before, and that means money (especially at a 0% interest rate) will not sit on deposit and will instead move to corporate bonds which will thus be a way of extending credit to companies and they can finance projects.

In the past many would ‘fly to quality’ …

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