Rise of the Silver Surfer and Mortgage Insurance Wasteland 15 comments
an article to
-
Font Size:
-
Print
- TweetThis
Rise of the Silver Surfer
I have not written about the precious metals in a while, I know you are all so waiting for a metals post. Haha. There were some gold and silver related items I have been watching lately that I will share today.
First up is the strange move by COMEX to make sure everyone understands that they can in fact deliver paper interest from exchange traded funds (GLD,SLV) in place of physical metal delivery. This should make it clear that COMEX may one day deliver to your door a certificate that says you are holding ounces of a metal in your hand, and not just a piece of paper. What could go wrong?
From Jesse's Cafe:
Paper, Scissors, Gold
As you may have heard recently, the COMEX has asserted their right under their rules to deliver the equivalent paper interest in Exchange Traded Funds such as GLD in lieu of the delivery of physical bullion for those standing for delivery under the rules of the commodity exchange...
We have often said that when the real crisis of liquidity comes, and the final flight to safety from the credit bubble collapse begins in earnest, the exchanges will alter the rules to allow for cash and paper settlement of claims for bullion, which they cannot or will not be able to deliver at the agreed upon prices.
This is what makes the current structure of the short positions held by a few banks on the precious metals exchanges a 'racket,' a type of Ponzi scheme where the same thing is sold repeatedly with no means of satisfying the aggregate of the claims and ownership.
We are sure the Comex is "well capitalized," and will continue to be so, even as it is rocked by de facto delivery failures and the substitution of more paper to back up the general failure of paper.
The wheels of justice grind slowly but they grind exceedingly fine.
Ouch.
As for my personal favorite metal, silver, The Mogambo Guru chimed in Friday with some mind boggling facts (excerpts):
The Silver Supply/Demand Imbalance
..But sometimes something comes along that makes me think about silver, such as David Morgan of the silver-investor.com site reporting that “during the past ten years, silver’s use in industry has gone from roughly 35% of the entire annual production in silver, to greater than 50%. Not only that, but it is the fastest growing area of the silver market.”
...So how much silver was mined? Well, the commoditynewscenter.com notes that “According to the US Geological Survey, about 672m ounces of silver was mined in 2008. And with an average silver price of $14.94 per ounce, if all mined silver was sold at spot, the entire supply chain would generate revenues of only about $10 billion.”
...And since this is after decades of dis-hoarding of strategic stockpiles, the result is that “Today, most of the U.S. silver stockpile is gone,” and whereas “the world once had about 2.2 billion ounces of silver above ground,” now there are “only about 300 million ounces. In other words, total world silver supply has plummeted by over 86% just in the last few years…while silver demand has gone UP!”
Have I ever mentioned I love silver for the long haul? No? Well, I just did.
What's the Future of Mankind? How do I Know, I Got Left Behind
"People look to me and say
Is the end near, when is the final day?
What's the future of mankind?
How do I know, I got left behind"
Ozzy Osbourne's "I Don't Know"
A smart person knows what it is they do not know. Ask 100 people if they think they are of "above average intelligence" and 85% of the respondents will say they are. Of course, in any sample size you have the good old Gaussian distribution so we know that this cannot be the case. As a card carrying member of the mental middle of the pack, I am aware I am lacking in many market understandings and thus I try to stay away from things I feel unqualified to opine on. Take Zero Hedge and Tyler's coverage of High Frequency Trading. I know it is important, but I really am not clear how it is done (or why it is allowed, but that is another discussion). Two items from the past few days also had me vexed, so I will share my bemusement with the readers.
MGIC and CIT Make No Sense to Me
The area of mortgage insurance must be a nuclear wasteland in the current market meltdown. The two biggest players are PMI and MTG. This week MTG was out with earnings, well, loss guidance, and that is where all the action begins:
MGIC 2Q loss widens, plans to shift new business
MILWAUKEE (AP) -- Private mortgage insurance provider MGIC Investment Corp.'s loss for the second quarter widened, the company said Thursday, as delinquencies increased due to increased unemployment, lower home prices and the ongoing recession.
For the three months ended June 30, MGIC lost $339.8 million, or $2.74 per share, compared with a loss of $99.9 million, or 81 cents per share, in the year-ago quarter.
About what you would expect. Very bad indeed. On top of this, most headlines were showing "MGIC to end new origination" and this of course would have serious implications for the housing market. Market Ticker had a write up you can see here.
So what has me confused? This information:
It also said it plans to shift newly written insurance to a subsidiary beginning Jan. 1, and the parent company will then stop writing new business.
The company said the state of Wisconsin has allowed MGIC to contribute up to $1 billion to its subsidiary MGIC Indemnity Corp. to enable that entity to begin writing new mortgage guaranty insurance as of Jan. 1. MGIC plans to provide the capital in two $500 million installments, with the first slated for July 31.
However, the state's insurance commissioner must still specifically authorize the subsidiary to begin writing insurance, as must each state.
The subsidiary must also be approved as an eligible insurer by Fannie Mae (FNM) and/or Freddie Mac (FRE), neither of which has yet done so.
"We cannot predict whether these approvals will be obtained and if so on what conditions," the company said.
If they must continue to write new business through the parent company, MGIC "will need either additional capital or relief from the regulatory capital requirements in 16 states," the company continue. In 14 of those state, relief will require new legislation or insurance regulation changes.
MGIC said it has not yet tried to raise capital from private sources, but has had discussions with the U.S. Treasury to seek a capital investment.
See what I mean?
MTG is basically done. They cannot do any new business and need gobs of capital to go on. So they are done? Well, no. I guess you can make a new company, capitalize that, and through the magic of financial engineering nobody is supposed to see that the new company is just a smaller version of the bigger failed one. Amazing.
I have no idea how this works or who would pony up any money for it. Never fear, here is the 5 day chart for a company that will no longer do business and will use a "mini me" firm to write new coverage as if nothing is wrong:
click to enlarge
Nice chart.
The other news that has me befuddled is all the wrangling over the fate of CIT. The government seems ready to let CIT go down and they judge that CIT is not a good taxpayer money risk. I mean things have to be really bad for that to be true. Friday there was serious talk (and a 70% rise in the penny stock) that either or both Goldman Sachs (GS) and JP Morgan (JPM) could extend the firm some financing. This of course makes no sense.
If CIT could not get US government assistance at great terms because they could not even qualify in the eyes of the FDIC and Treasury, there is NO WAY they can meet the onerous terms GS or JPM would surely impose. This is either a false rumor, or an orchestrated move by the FDIC/Fed/Treasury to make the market think there are non government avenues of capital out there. Spare me gentlemen, there are none. Please explain to the best of your ability what gives here in the comments.
Book Reviews
I have read two books in the past two weeks that I thought I would share.
The first was Barry Ritholtz' "Bailout Nation". I must say that this book was really great. Over the past 2 years I have forgotten all the help that has been extended, and more important I had the entire timeline of events all jumbled. Bailout Nation has rich history lessons on the Fed, bailouts across time, and banking regulations that are a must read. The book even reads fun which is not something I can say about most economic themed books. I was thinking I might pick up a couple of copies and run a couple of contests with the book as the prize.
The second book I read this week has already become a favorite. Robert Heinlein's "The Moon is a Harsh Mistress" is a masterpiece. I was so engrossed with the tale I could not put it down and read it in two blocks of 3 hours. While on the surface a Sci-Fi tale, it really is a lesson in self reliance and self determination. If you are of a libertarian bent, you will love this book.
Disclosure: I own GLD and SLV but I am well aware of the physical shortcomings of the funds. I only use them as a proxy for the metals. I own silver via multiple channels.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Shift happens.
Things usually do not make sense when you have the wrong assumptions, the underlying theory is incorrect, or there is a missing piece of information.
On the CIT bailout by GS and JPM, the disconnect is in the assumption that these two corporations are acting by themselves and not as proxies for the government. I suspect a very shadowy symbiosis between these companies and the government (some would call it collusion), in which these companies are promised untold riches (now and in the future) by the political class, in exchange for keeping the economy from unraveling which raises the probabilities of an overthrow of the one-party system we have. A bribes for profit arrangement that works very well for those empowered and keeps the masses fed and in the dark for a few more years. It has always worked like this I think, now it is becoming more obvious because things are falling apart so fast and furious that the degree of manipulation has to be intense, levels of hypocrisy also had to be pumped.
I can say that I indeed have limited understanding of how MTG or PMI operate in the insurance business. What I was highlighting was the strange "we will make a new subsidiary" and somehow that makes everything ok.
Manya05,
I was trying not to believe JPM and GS were working for the government here (and as of right now still no CIT news) but I think that hope is silly.
Barry Robbins,
I will check those two recommenadtions out. Thanks
Perhaps most of us only read the headlines. If you dig deeper, the MTG story is very interesting. This is an insurance company with very stable revenues. The underwriting expenses are down and investment income is pretty stable.
The only significant variable in the company's profit and loss statement is the amount being set aside for loss reserves. The amount set aside for loss reserves over the last few years add up to over $5 billion. The amount of actual paid claims is only slightly more than MTG's actual cash flow for from operations. Consequently, the headlines over the last few years have consistently been about MTG losing money. However, at the same time, the cash flow has been only slighty negative and at times positive resulting in a very large and increasing loss reserve of $5 billion plus.
MTG, PMI and RDN have all explained in their quarterly webcasts that they believe they have sufficient loss reserves to cover future losses. In the case of MTG, regulators are allowing it to use $1 billion from the loss reserves in order to capitalize a new subsidiary. Hence, the new subsidiary will issue new policies and the old company will pay old claims which everyone involved believes will be less than the $5 billion set aside for loss reserves.
If the management of MTG is correct and their loss reserves are adequate to pay all claims, and if MTG is successful in transferring its new operations to its wholly owned subsidiary, then MTG should be able to ride out the mortgage crisis and continue to do business as normal.
From 1996 to 2007, MTG showed earnings of $4 plus per share. If MTG is successful in transitioning its operations to its new subsidiary, shareholders could easily find MTG's earnings returning to historical levels.
This is the best of breed in a very badly beaten down industry, but to understand all of the risks and rewards, you have to look much deeper than the headelines.
Thanks for the in depth comment. You clearly have a real understanding of this issue. I appreciate your input. Do you think both MTG and PMI go on, or will one win out?
The problem they face, and the reason the stock prices are beaten down so much (I believe), lies in the regulatory realm of things:
First of all, they have to build up reserves based on the delinquencies they have in their books. These cos have built the reserves that are in multiples of their annual claims paid (even for 08-09). The reserves drain their liquidity, so the market is concerned they wont be able to pay on their debt due in two-three years. Remember, it takes forever for them to pay claims after a borrower becomes delinquent (if they default).
Also, because of reserve build up, there is a concern they might be forced to stop writing business, because the amount of risk they take on vs. the capital they have (which is being more and more restricted by the reserve issue) is limited by the regulators. Thus, MGIC had to play the regulatory trickery with the new entity set-up.
I am not an investor in any of them, but back in previous life worked at one of them (12 years ago). I do find their situation fascinating though, as so many confluent factors are affecting their balance sheets and valuations. For example, if things start to turn around in the housing market, and MIs will be able to reduce reserves, watch out.
I do think they will survive, and so few analysts that upgraded MGIC in the past few days following their report.
On Jul 19 07:27 PM Economic Disconnect wrote:
> The Mortgage Guy,
> Thanks for the in depth comment. You clearly have a real understanding
> of this issue. I appreciate your input. Do you think both MTG and
> PMI go on, or will one win out?
There is plenty of room in the MI industry for a few players. I believe there are currently too many, but I believe the companies that are adequately funded will survive in the short term and thrive in the long term as long as the federal government does not change the current laws requiring Fannie and Freddie to require mortgage insurance on loans with loan to values greater than 80%.
In my opinion, MTG has a better chance than PMI and RDN of surviving because it's plan does not require a governement bail out. In addition, iMTG has had significant insider purchasing and it's risk to capital ratio is currently less than 14:1.
PMI and Radian seem to be relying on the Treasury to bail them out. Their plan seems to be: Ask the treasury for help. If plan A fails, ask again. Hopefully, PMI and RDN's next earnings report and webcast will outline something more creative than asking for a government bail out.
Both PMI and Radian currently have risk to capital ratios which are much higher than MTG's. Based on current regulations, if the ratio goes above 25:1, they can no longer underwrite new policies which effectively puts them out of business. I have not seen any significant insider buying at either PMI or Radian. Based on my review of their revenues, it appears they have had to restrict underwriting new mortgage insurance policies and have lost some market share. MTG has gained a little market share in the last few quarters.
I believe there will be a few companies which will be survivors in this industry. The key to surviving will be keeping the risk to capital below 25:1 so that new business can be underwritten (The earnings calls for MTG and RDN have confirmed that the new MI policies issued in the last 5 quarters have been very profitable).
There are currently about six companies issuing mortgage insurance. Genworth and Old republic have other lines of business and could possibly generate additional capital to keep their risk to capital below 25:1. MTG seems to have a plan which will allow it to keep it's risk to capital below 25:1 (as long as it gets the needed state and agency approvals).
In the long term, I believe that the MI industry will see some changes in the names of the players, but that the industry will resemble the MI industry of the 1990s: The survivors will underwrite conservatively: there will be very little competition from piggy back seconds. The business will generate consistent profits with less than 50 percent loss to premium ratios. With the creative financing of the last decade gone, the companies that survive should be very profitable.
l 19 07:27 PM Economic Disconnect wrote:
> The Mortgage Guy,
> Thanks for the in depth comment. You clearly have a real understanding
> of this issue. I appreciate your input. Do you think both MTG and
> PMI go on, or will one win out?
Thanks for the information. One of my favorite aspects of writing here is the great comments section. An excellent comment and I appreciate the inside look at mortgage insurance.
Thanks
SALT
I usually like miners, but see the Nemont Mining (gold miner, but same) today and you will see that PM miners tend to make huge earnings misses for seemingly inexplicable reasons. They can be tough to stomach.
GoldMoney (goldmoney.com/index.html) is highly recommended by Mish Shedlock, and I have heard great things about it. There are a few independent gols/silver houses that guarantee your metals are there physically, so shop around.
Last week and this week are earnings season for most Mortgage Insurance companies. last Thursday night Genworth filed its quarterly reports with the SEC and on Friday morning the company had its webcast.
As I listened to the webcast several interesting points were made:
1) The state regulators for Genworth are willing to consider a risk to capital ratio above 25:1 if the regulators feel the company is financial sound. To me these means that the state insurance regulators for Genworth will consider bending risk to capital guidelines to allow them to continue to issue more mortgage insurance policies.
2) Insurance premium rates have increased by 20% and the use of captive insurance relationships has been discontinued. The net result is an increase in premium rates compared to 2007 of as much as 30%.
3) The new policies issued have a very low default rate and with the increased premiums, new policies are very profitable.
I hate to be a homer for the mortgage insurance industry, but let's be candid, I am. (I hold shares in several mortgage insurance companies and I intend to hold it for the long term). Mortgage insurance has traditionally been one of the most profitable insurances offered. As stated above, the rates have recently increased by 20 to 30%,. The risks of default are very low on new insurance policies written (Stated by management at MTG, GNW and RDN). RDN, MTG and GNW management have all stated recently that they feel the loss reserves are more than adequate to cover insurance previously issued.
With higher premiums, and default risks on new policies within a tolerable range, it seems probably that the business of mortgage insurance will once again prove to be one of the most profitable forms of insurance.
With this in mind, perhaps the worst is over for the better capitalized mortgage insurance companies.
FYI, Radian releases its quarterly statements on August 5th. The webcast for these companies is always very informational.
On Jul 20 06:09 PM The Mortgageguy wrote:
> Economic Disconnect:
>
> There is plenty of room in the MI industry for a few players. I believe
> there are currently too many, but I believe the companies that are
> adequately funded will survive in the short term and thrive in the
> long term as long as the federal government does not change the current
> laws requiring Fannie and Freddie to require mortgage insurance on
> loans with loan to values greater than 80%.
>
> In my opinion, MTG has a better chance than PMI and RDN of surviving
> because it's plan does not require a governement bail out. In addition,
> iMTG has had significant insider purchasing and it's risk to capital
> ratio is currently less than 14:1.
>
> PMI and Radian seem to be relying on the Treasury to bail them out.
> Their plan seems to be: Ask the treasury for help. If plan A fails,
> ask again. Hopefully, PMI and RDN's next earnings report and webcast
> will outline something more creative than asking for a government
> bail out.
>
> Both PMI and Radian currently have risk to capital ratios which are
> much higher than MTG's. Based on current regulations, if the ratio
> goes above 25:1, they can no longer underwrite new policies which
> effectively puts them out of business. I have not seen any significant
> insider buying at either PMI or Radian. Based on my review of their
> revenues, it appears they have had to restrict underwriting new mortgage
> insurance policies and have lost some market share. MTG has gained
> a little market share in the last few quarters.
>
> I believe there will be a few companies which will be survivors in
> this industry. The key to surviving will be keeping the risk to
> capital below 25:1 so that new business can be underwritten (The
> earnings calls for MTG and RDN have confirmed that the new MI policies
> issued in the last 5 quarters have been very profitable).
>
> There are currently about six companies issuing mortgage insurance.
> Genworth and Old republic have other lines of business and could
> possibly generate additional capital to keep their risk to capital
> below 25:1. MTG seems to have a plan which will allow it to keep
> it's risk to capital below 25:1 (as long as it gets the needed state
> and agency approvals).
>
> In the long term, I believe that the MI industry will see some changes
> in the names of the players, but that the industry will resemble
> the MI industry of the 1990s: The survivors will underwrite conservatively:
> there will be very little competition from piggy back seconds. The
> business will generate consistent profits with less than 50 percent
> loss to premium ratios. With the creative financing of the last
> decade gone, the companies that survive should be very profitable.
>
>
> l 19 07:27 PM Economic Disconnect wrote: