Wednesday, October 27, 2010

Economy & Market Week Ended 10/22/2010

QE2 (quantitative easing) expectations dominated the market with Fed meeting scheduled for November 3rd.  Edward Hugh sees QE2 as inevitable, because the Fed has decided it is necessary to devalue the dollar in order to improve trade balances and unemployment.  Still, this has global impact and does not solve the internal problems and structural imbalances of China and the United State or other countries, including the eurozone.  He also makes an argument that the current reserve currency basket - yen U.S. dollar, euro, and pound - should be devalued.  Although he sees QE2 as inevitable he does not look forward to the pressure on the euro and others have also argued against the risk and its probable failure to impact unemployment.  Joseph Stiglitz in "Why Easier Money Won't Work" is adamant that easy money will not work, because it runs the risk of rising equity prices, rising expectations of inflation despite low interest rates, a potential bursting of the bond bubble, and a weak dollar hurting the very countries to which we want to export.  While the Fed is considering what is in effect only a switching of assets on their balance sheet from the purchase of short term treasuries to longer term treasuries, David Blanchflower has heard them discussing the possibility that they could purchase municipal bonds and mortgage backed securities from Freddie Mac and Fannie Mae bailing out both the housing market and state governments.

The incontrovertible evidence of growing income inequality, as we discussed last week and at other times in the past, continues to be a current topic of economic concern as it has vast impact on the future of a democratic society and the vitality of an economy.  Mark Thoma shows a chart of the huge divergence since the 1970's and has listed several of his posts on the subject.

A finance and economic academic assessment of the Dodd-Frank Reform Bill has been published.  It sees a derivatives market reform as comprehensive when it was not; it sees the Volcker rule and the framework for resolving systemically risky financial institutions as having its heart in the right place despite the incomplete approach and application.  The assessment finds problems with the mispricing of government guarantees throughout the financial sector, financial firms are made to bear the cost of their own losses (imagine how revolutionary it is to have a private company responsible for its own losses!) but fails to make them bear the cost impose on others, it often regulates by form rather than function, and it makes important omissions in reforming and regulating the shadow banking system.  The assessment completely ignores the blunted consumer protection agency and the failure to make it independent as well as ignoring financial advisor fiduciary duty by letting the salespeople's regulatory agency (SEC) to float what ideas will be acceptable to the financial sales organizations.  It took five people to write this very weak and short assessment.

The economist Bill Mitchell sees the mortgage mess as proof that government leaders are unwilling to demonstrate leadership and use fiscal policy.  This leads him into a discussion of quantitative easing in the United States and the United Kingdom and he also references the David Blanchflower article also reference above as well as how austerity impacts an economy and how targeted fiscal spending could be more successful.  Besides the macroeconomics, Bill Mitchell also makes several proposals to resolve the mortgage mess while totally ignoring the fraudulent aspects of the contract process and documentation.  He sees it as just a normal part and development of a financial crisis.  Still, his article strikes at the heart of the arguments against moving the economy to growth, reducing unemployment, and making life better for the middle class and not just the wealthy and elite.

John Hussman in his October 18th weekly commentary deconstructs the prospect of another round of quantitative easing (QE2) as reckless. QE2 would have two goals: 1) lowering long term interest rates to hopefully stimulate loan demand and discourage saving and 2) to increase the ability and need of banks to lend.  On the demand side of constraints on QE2, the United States is in or approaching a liquidity trap in which interest rates are already low enough to not be primary drivers of loan demand; businesses want customers and opportunities for profitable investments before they go seeking loans and individuals lack confidence that there is sufficient income future to spend rather than save and reduce debt.  On the supply side, there is already sufficient liquidity in the financial system to provide loans, although banks have been allowed to carry toxic assets at inflated values, which means their balance sheets are not an accurate reflection of assets and liabilities.  Because the constraints are not binding, QE2 will have little effect in stimulating increased economic activity or employment.  The banks have profited by massive write-ups of assets on the balance sheet and large reductions in loan loss reserves on the income statement.  The Fed expects the ensuing weaker dollar to improve exports, but data has shown that imports are more elastic to fluctuations in the dollar than exports have been.  Consequently, further dollar devaluation is more likely to have negative global economic effects and create a negative wealth effect in the U.S. lowering consumption. Besides future difficulties for the Fed in reducing its balance sheet may create a situation in those Fed sales could risk pressuring interest rates higher and choke off any recovery. Historically, both internationally and in the U.S., Hussman finds "...that suppressed interest rates are not correlated with an acceleration of real economic activity, but rather the hoarding of commodities."  The prices of commodities rise and the investment in commodities becomes riskier.  He believes QE2 has already been reflected in the current stock, bond, and commodities markets and this demands that the QE2 be successful, which is a dangerous proposition.

The blog Pragmatic Capitalist believes there is at a risky position with an air pocket beneath risk assets and QE2 is only going to make it worse, because it will not increase wages, jobs, or economic output.  "QE adds no net new financial assets to the private sector."  This earnings season compounds the irrationality because they are "better than expected" as the result of analysts reduced estimates, companies have purposefully sandbagged estimates to create "better than expected" results, and past year poor economic performance comparisons.  Any turn towards austerity and less government stimulative action will create headwinds.  Political gridlock removes a powerful tailwind.  Pragmatic Capitalist uses an indicator it calls "qualified disequilibrium" to quantify disequilibrium in the market with successful investing results and is currently finding that the risk component has only been at current levels or higher twice in the last five years: September 24, 2007 and January 5, 2009.  It is possible the U.S. dollar is oversold and equities overextended on false hopes of QE2.  Consequently, the market is over concerned with inflation while we are moving closer to disinflation and the risks of deflation.

Pragmatic Capitalist observes that the macroeconomic trends indicate a double dip is unlikely but prolonged economic sluggishness is a growing reality.  The past 18 months of inventory restocking and government stimulus are slowing down and ceasing based on ISM new orders and inventory data, which is correlated by the ADS Conditions Index.  Economic growth will remain weak, because the private sector has not recovered and the lack of sufficient and continuing government stimulus.

The Consumer Metrics Institute, in their October 19 news , show the current number of days in contraction, even assuming a bottom has been reached, are approaching the duration of the financial crisis recession which ended in June 2009.

The Fed Beige Book of anecdotal business information from all Federal Reserve Districts conveys that economic activity is continuing to rise but at a modest pace.  Manufacturing activity continued to expand; retail spending was flat to moderately positive; housing markets remained weak; input prices rose slightly but finished goods and services prices were stable; commercial real estate conditions remained subdued; lending activity was stable at low levels; wage pressures remained minimal; and hiring remained limited.  Fed speak has a way of sugar icing a "modest pace".

The G20 meeting got off to a predictable start, despite Germany accusing the U.S, of manipulating the dollar
and concerns voiced by host South Korea, among other nations.  Much was made of Europe giving up some of its IMF voting seats to emerging countries.  The Saturday (October 23) ending with a promise to avoid currency devaluations left no one with any expectation that the possibility of currency wars and trade sanctions were not still a looming probability given the Federal Reserve's likelihood to begin QE2 the day after the November election.

With respect to the PPACA, regulators have clarified that changes in one employer health insurance plan does not risk the grandfathered status of other employer health plans.

Market Report:  7 banks failed = 139; unofficial problem bank list is 871.

                               DOW/Volume                                      NASDAQ/Volume
                     80.91/ down 29.6%                                   11.89/ down 21.5%
                   <165.07>/ up 27.8%                                  <43.71>/ up 28.5%
                     129.35/ down 13.3%                                 20.44/ down 7.2%
                       38.60/ down 4.3%                                     2.28/ up 5.3%

                     <14.01>/ down 26.9%                               19.72/ down 26.0%

Total                     69.78                                                         10.62

Mon: Oil up $1.83 to $83.08; Dollar weaker but mixed against the pound; bans up and techs down.

Tue: Oil down 3.59 to 70.49; Dollar stronger; China raises interest rates on 1 year deposits and loans; Apple disappoints on iPad sales and profit projection; Bank of America sued to pay back $47 billion of mortgage loans; commodities fell on China interest rate.

Wed: Oil up 2.28 to 81.77; Dollar weaker; Boeing and banks up; Fed Beige Report shows mixed and modest growth; oil supplies up 700,000 barrels, gas supplies up 1,2 million barrels, and distillate down 2.2 million barrels.

Thu: Oil down 1.98 to 80.56; Dollar stronger; wide, volatile swings; markets near resistance highs; weekly jobless claims down 23,000 to 452,000, 4 week moving average down 4250 to 458,000, and continuing claims down 9000 to 4,441,000.

Fri: Oil up 1.13 to 81.69; Dollar stronger but mixed against the euro; lightest Dow volume since September 10; restaurants and big cap techs led.

United States:

U.S. industrial production down .2% September and capacity utilization down to 74.7 (5.9 points below average).

Housing starts were up .3% September.

GMAC has found no evidence of inappropriate foreclosures.  In Citi conference call, there were no questions on the foreclosure mess and only one on securitization.  Bank of America is lifting a halt on foreclosures in all 23 states which require a judge's approval.  J. P. Morgan and Morgan Stanley both came out with independent reports which both said the foreclosure mess is fixable and both said the probable cost for all banks would be only $55 billion.  Citi said the foreclosure process is sound.

The Federal Home Loan Bank of Chicago is suing Bank of America, Goldman Sachs, Citi, and Wells Fargo for failure to disclose lax underwriting standards which caused losses.

The3 New York Fed, Pimco, Blackrock, and fifty other large investment firms are suing Bank of America to buy $47 billion in mortgage bonds.

FDIC will not raise deposit insurance fees as planned, because the costs may be "only" $52 billion as opposed to the original estimate of $60 billion for 2010-14.

U.S. commercial property prices fell 3.3% August to the lowest level in 8 years (Moody's).

The Financial Fraud Enforcement Task Force is looking into whether mortgage servicers misled federal housing agencies.

Wells Fargo said its foreclosure procedures are sound and there will be no moratorium on foreclosures.

Philadelphia Fed Mid-Atlantic business activity index up to 1.0 October from <.7> (economists expected 2.0) and new orders were up to <5.0> from <8.1>.

Bair (FDIC) expects U.S. banks capital will have to be higher than the capital requirements in Basel III agreement, but she needs to confer with the Fed, which regulates the large banks.

Fannie Mae and Freddie Mac may need another $215 billion in addition to capital already received ($148 billion) from the U.S. Treasury through 2013 to offset losses.

The ECRI Weekly Leading Indicators continue to improve and is up to <6.8> from <7.0>.

Illinois unemployment was 10.1 in August (10.3 in July).  Nevada had the highest unemployment at 14.4%.

Of the seven banks which failed this week, one in Arizona found no buyers and the FDIC will pay out to depositors.

U.S. Treasury yield spreads between 2 year and 10 year increased to 2.204% with 10 year down to 2.55% and 2 year down to .35% (record low is .327) in anticipation of QE2.

Citi net income was down 20% with diluted EPS of 7 cents per share ($2.2 billion) which was $529 million less than the previous quarter, but it still beat estimates as income was higher, because Citi lowered loan loss reserves by $2 billion.  Profits suffered from lower trading volume.

Yahoo profit beats estimates but sales disappoint.

Wells Fargo loan losses were down 20% to $4.1 billion; EPS up 7% to 60 cents per share (expected 55 cents).

Boeing profit up to $1.12/share (expected $1.05); revenue up 1.7%; and it raised full year views to $3.80-4.00 (expected $3.69).

Caterpillar Q3 EPS up 91% to $1.22 per share (expected $1.09); sales up 53%, but warned on future profit margin and growth.

Pension costs cut Honeywell profits by 18 cents per share with Q3 profit down 20% to 64 cents per share (expected 66 cents); net sales up 9%; Q3 EPS up 14% to 80 cents per share (expected 79 cents).

AIG Asian Life IPO raised $17.9 billion.

Fisher (Dallas Fed) said the Fed needs fiscal and regulatory authorities to help if the economy is to grow at a faster pace.

Lockhart (Atlanta Fed) said quantitative easing is insurance against disinflation.

Dudley (New York Fed) said the economy is "wholly unsatisfactory" with slow growth, weak job creation, and declining inflation.

Fisher (Dallas Fed) said a foreclosure halt could hurt economic growth and prevents the housing market from clearing.  His statement was echoed by the FDIC and other government officials throughout the week.

Lockhart (Atlanta Fed) said further central bank bond purchases must be large enough to jump start the economy --- maybe $100 billion a month.

Bullard (St. Louis Fed) supports QE2 in $100 billion tranches on a meeting by meeting decision basis.

Plosser (Philadelphia Fed) does not see the benefits of more asset purchases, because they do not sufficiently impact unemployment and there is no necessity with respect to the inflation forecast.

Hoenig (Kansas City Fed) said the Fed runs the risk of creating new problems if it floods the economy with cash.  He is unhappy with unemployment but fears a "quick fix" will create the next problem.


China intends to restructure and rebalance its economy over the next five years.  The five year plan pledges to boost household income and spending, particularly among farmers to address growing inequality.  China raised interest rates on one year deposits 25 bps to 2.5% for the first time in three years and one year lending rates 25 bps to 5.56% surprising the international markets.  The interest rate had fallen below headline inflation (3.5% August and 3.6% September).  This is a very serious signal they are concerned about overheating and the will also test a trial property tax in some cities.  It may also cause more foreign capital inflow which could sustain inflation growth.  It also told commercial banks to stop offering loans to buyers of third house and extended the 30% down payment to all first home buyers.  There is still large political opposition to slowing loan growth in China.

Internationally, China is not seen as the lone culprit in any potential currency wars as many nations are concerned about the impact of a weaker U. S. dollar resulting from more quantitative easing will have on their currencies and economies.

Rioting in France over retirement reforms which would increase retirement age from 60 to 62 continues to spread and harden in France.  It is causing major disruptions in fuel refining and distribution.

U.K. will cut 490,000 jobs (8%), raise the retirement age to 66, and cut $28.5 billion in welfare.

Brazil increased the tax on foreign investment in fixed income securities for the second time to 6%.

Thailand put 15% tax on income on its bonds.  Both Brazil and Thailand are trying to cool their economies from overheating caused by the weak U.S. dollar.

An unofficial Chinese Commerce Ministry person said China, which produces 95% of world's rare earth materials used in high tech manufacturing, plans to cut exports 30% by year end to conserve resources; the next day an official Commerce ministry official denied this.

Chinese GDP was up 9.6% vs year ago in Q3 (10.3% in Q2) and consumer inflation was up to 3.6% (a 23 month high).

Eurozone PMI (Purchasing Managers Index) was down .9 to 53.2 October (lowest since February); slower growth in France was offset by unexpected growth in Germany.

Bank of Japan will consider, at its October 28th meeting, buying BBB and a-2 commercial paper (lower quality) to help companies borrow money.

The French Senate passed the pension reform and increase in the retirement age but the bill now requires both houses to reconsider to resolve language difficulties in the bills passed by each house and new votes in both.

A researcher for the Chinese Academy of Governance, which is a government advisory board, said China must raise interest rates one more time this year.

Japan is close to signing a deal to mine for rare earth metals in Vietnam after the recent temporary halt of exports from China.

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Friday, October 22, 2010

Foreclosure Gate Ignored in 2007, Ignored Now

In 2007 on our radio show, we focused on a Federal judge's decision in Ohio to throw out mortgage foreclosures, because the documents could not establish who actually owned the mortgages.  We continued to report into 2008 how this decision had spread to other Federal judges and Ohio State judges and then to other Rustbelt states.  We brought Judge Boyko's decision and the spreading use of the due process approach to the personal attention of Illinois Attorney General Lisa Madigan, although we have never seen any action from her office.  While there is a joint investigation by all fifty (50) state attorney generals and the District of Columbia, we are already seeing the lame duck attorney general of Florida running to the corner of the mortgage companies and servicers.

Mike Konczal has brought attention again to Judge Boyko's 2007 decision that sparked a localized judicial revolt which was not supported by the U. S. Department of Justice.  The Administration sees no substantial problems and has expressed confidence the banks and mortgage servicers can deal with the problems themselves.  Just as the major media ignored Judge Boyko's decision in 2007 and the regional judicial revolt as the Department of Justice opposed the application of due process confirmed by Judge Boyko, the current Administration and leaders of both political parties want the attention of the public to go away even if it means the destruction of the Constitutional right of due process and legitimization of fraud by big banks and mortgage servicers if enforcement of law threatens large financial institutions and the housing market, which is damaged and limping from the burst housing bubble caused by insufficiently regulated mortgage lenders and banks as well as a Federal Reserve Bank which could not recognize a leverage bubble over several years acerbated by low interest rates.

Yves Smith has captured the see nothing, do nothing strategy of the current Administration and its failure to seek regulatory review and the protection of the public welfare through rigorous application of law.  Simon Johnson also inquires why the Financial Stability Oversight Council is not directly involved and hot and heavy on this issue.  To me, this is also a perfect issue and a perfect case for the Consumer Financial Protection Agency being formed at the Federal Reserve.

Already the PR and lobbyists hordes are trying to spin the mortgage mess as minor inconsequential paperwork problems easily corrected as the major banks which are at risk for approximately $80 billion as a possible result of the foreclosure gate fraud have determined within two-and-a-half weeks that it is not a problem and foreclosures should resume.  Blame is being cast against attorneys who are aggressively defending their clients in foreclosure, while the attorneys and servicers who have robo-signing mills are portrayed as overworked soldiers in the fight against dead beat home owners who are not paying their mortgages.  In the 19th Century as the result of the Civil War the Homestead Act lead to an economic social revolution in the ability of a head of a family to own a home for their family.  In the 18th Century, "life, liberty, and the pursuit of happiness" was a well known philosophical argument that men had the God given inalienable right  to provide food, clothing, and shelter for their families.  In the 21st Century, we are seeing the destruction of the middle class, a huge surge since the 1960's to currently obscene levels in wage/earnings and wealth inequality compounded by very profitably rewarded financial industry overly risky speculation and derivative securitzation, and the suppression of the Constitutional right of due process under the law.  If the current Administration will not support and defend due process under the law there is No Hope.  It is time for this legal morass to stop and the financial institutions made to obey the law.  Financial "stability" at the expense of a free republican democracy and a return to a modern benevolent serfdom is not acceptable.

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Tuesday, October 19, 2010

Economy and Market Week Ended 10/15/2010

The Illinois Comptroller's October 2010 Quarterly report (it loads slow and you may have to refresh from time to time to get it) provides a grim picture on backlogged payments and lower revenue.  The report also comments that the State has a structural imbalance in current accounts, higher debt service costs, and loss of federal stimulus money which could leave the budget deficit at the end of FY2011 at $15 billion dollars, which is the number I was putting out as possible earlier in 2010 during budget debates (it is usually reported as $13 billion).

September Consumer Price Index (CPI)  was 1.14% (1.15% last month) and core, without food and energy, was .8% (a 49 year low).  Core went down .2 and all items went up .1.  If one used the old 1980's calculation, all items would be approximately 8.5% and, if the old 1990's calculation was used, it would be approximately 4.3%.

John Hussman October 11th weekly commentary finds little in recent economic evidence to change his concern about the likelihood of a second economic downturn.  Looking at 7 year returns, in which over and under valuation is more sensitive, the total return is 2% annually, which is less than the 4.34% annually for ten year returns.  It is likely the market will achieve negligible returns in the next 5-7 years.  The stock market is substantially overvalued and investors are diverted from the larger macro economic big picture by short-term news and investing as a sport celebrated on financial television.  He is worried the global financial system could jump from benign to crisis mode very rapidly.  Cash flows are not sufficient to ultimately service existing obligations over time.  Banks are allowed to carry assets on their books at values above their tradable market value which is not proper financial reporting.  The suspension of foreclosures, because the proper documentation does not exist, increases uncertainty.  Market small advances to new marginal highs during an overvalued, overbought, over bullish market are often seen with small 2-3 day pullbacks with a resumption of small advances which make the advance seem relentless until an abrupt, steep "air pocket" is hit wiping out weeks or months of advances.  Many people in looking at 5 year returns fail to understand that a 5 year zero return could be the result of a 32% drop followed by four years of 10% gains each year.

We have been talking about the possibility of a currency war and the subject continues to gain popularity as nations avoid dealing with their own internal problems.  It is well recognized that currency is used in trade wars and that the effects are felt globally, not just China and the United States.  An over reaction to China's currency could create internal problems within China that could have global consequences and actually not help correct trade imbalances, which may be skewed by not including foreign affiliate sales.  A good part of the blame lies with the United States and its weak dollar policy and use of quantitative easing (QE) which effectively devalues the U. S. dollar and raises the price of commodities.  The perception that the Federal Reserve will begin a QE2 in November has nations around the world scrambling to protect their currencies.  If the Fed does initiate a QE2, it will be an effective declaration of trade war and has gotten some Fed officials to publicly question if currency effects should be considered in any QE2 plan. Contrary to Martin Wolf, the United States is not a pro forma winner of a currency war nor will the U. S. suffer if China reduces its buying of U. S. Treasuries.  All such scenarios are diverting attention away from the need of countries to deal with their economic internal problems and stop fobbing them off externally.  The September Federal Open Market Committee minutes, pages 6-9, were interpreted by the market as strongly indicating their would be QE2 at the November 3 meeting, given the economic observations and other comments.

The mortgage problems in the foreclosure gate continue to unfold and, while there is a realization that the documentation does not exist and reforms need to be implemented to retain a just legal system, there is a growing concern that the banks will be allowed to skate under the cover of investigations by several governmental authority with no real halt in the fraudulent presentation of false documents in the foreclosure process or bank holiday.

It appears the large banks will also escape the imposition of a globally agreed higher capital requirements standard with the help of lobbyists and the opposition of France, Japan, and Germany, which did not want their banks seeking more capital.  In the United States, banks are attempting to circumvent the new Basel III rules on increased capital ratios by resecuritizing distressed mortgage bonds into new securities using a technique which failed in the credit crisis -- re-remics.  The FDIC has proposed a quasi bridge entity to resolve troubled financial institutions in the implementation of a resolution authority under the Dodd-Frank law. The Financial Accounting Standards Board (FASB) has proposed changes in how companies report troubled debt restructurings.which would directly affect how loan modifications of mortgages and corporate debt are reported.  When will we see factual mark to market of toxic assets?

Joshua Rauh, in the continuation of his pension research, said big U. S. cities could face a half trillion dollars in pension deficits through 2020.

Paul Krugman argues that there is a wide spread perception that government spending has not made things better, because the stimulus, as he has repeatedly said, was inadequate --- too small --- and the continuing high unemployment problem exists because the government has not tried to target job creation with a proper stimulus program.  There are many others who have and are saying the same thing and we have long maintained (from the beginning of the stimulus) that the stimulus program was too little too slow and did not target employment efficiently.

I have questioned in the past how effective auto-enrollment in retirement plans is, because the employees get dumped into default investments which are unlikely to provide the return they will need.  A new study has found that it can be successful if there is a higher automatic enrollment contribution rate cap, a successful program exists to reduce automatic contribution escalation opt-outs, and a higher annual auto-contribution escalation rate occurs.  This amounts to leading the mice through the maze.  There needs to be employee education to actively select their investment choices with professional conflict free investment advice and be shown the probability of retirement funding success.

U. S. Tax Court has recently limited an estate's credit for tax on prior transfers in the case of a couple who died three months apart, because the QTIP affirmative election by the executor of the first estate was not timely.

Market Report:  3 banks failed for a total of 132; the unofficial problem bank list is 875.

                 DOW/VOLUME                                                   NASDAQ/VOLUME
            3.86 / down 16.5%                                                       .42/ down 21.6%
          10.06/ up 17.0%                                                         15.59/ up 25.4%
          75.68/ up 25.8%                                                         23.31/ up 17.8%
            <1.51>/ down 3.8%                                                  <5.85>/ down 14.5%
         <31.79>/ up 26.7%                                                    33.39/ up 13.0%

Week      56.30                                                                        66.86

Mon: Oil down 45 cents to $82.21; Dollar stronger.  Market wants but has reservations about QE in Japan and U.S.; cannot make up its mind.

Tue: Oil down 54 cents to 81.67; Dollar weaker.  Market interprets FOMC minutes to favor QE in November.

Wed: Oil up $1.34 to 83.01; Dollar weaker but mixed against the yen.  Nasdaq rose above its resistance level.  Oil supplies were up 3.1 million barrels; gas supplies were down 2.6 million barrels; distillate supplies were down 1.1 million barrels.

Thu: Oil down 32 cents to 82.69; Dollar weaker.  Poor 30 year Treasury auction.  Banks face consequences of mortgage fraud.  Weekly jobless claims were up 13,000 to 462,000; 4 week moving average was up 2250 to 459,000; continuing claims were down 112,000 to 4,399,000.

Fri: Oil down 1.44 to 81.25; Dollar stronger.  Google and techs push Nasdaq up.  Banks hit for second day on mortgage fears.  GE revenue was down 5%.

United States:

Dudley (New York Fed) said bank concerns over higher capital requirements will reduce profits and impair economic growth are exaggerated.

Rosengren (Boston Fed) said a more proactive cutting of dividends by banks in the early stage of the financial crisis would have retained $80 billion in capital and regulatory policy needs to be more proactive going forward.

Hoenig (Kansas City Fed) said current equity capital standards must be set higher, because the financial industry structure and incentives are inconsistent with the market being the disciplinarian -- not market self-regulating.

According to the econbrowser, the stock market expects the Fed to begin QE2 in November and this is evidence of economic weakness.  The decrease in bond real rates and the increase in commodity prices are inconsistent hedges against expected inflation.

The Peter Diamond who just won the Nobel Prize for Economics with Martenson and Pissarides is the same person the Senate Republicans think is unqualified to sit on the Fed Board.

Yellen (Fed Vice Chair) said low interest rates may give firms incentive to take more risks and accommodative monetary policy could build leverage and excessive risk taking.  It may be necessary to take away the "punch bowl".

Hoenig (Kansas City Fed) said monetary policy will do little to promote economic recovery and the Fed needs to start to normalize policy consistent with modest recovery underway.

Lacker (Richmond Fed) will not support further monetary easing and is not worried about subdued inflation, because he is not convinced it is likely to remain low.

Rosengren (Boston Fed) said past monetary and quantitative easing was too slow and gradual.  There is probably no deflation but does not want even disinflation.

Bernanke said high unemployment and low inflation indicate further easing is needed, but the Fed is still weighing how aggressive.

Evans (Chicago Fed) said the United States is in a real liquidity trap and needs much more monetary accommodation to seek a targeted price level.

Joseph Stiglitz said the Fed and the IMF are wasting money and creating chaos.  Stimulus did not prevent unemployment from reaching 12-13%; it was too little badly designed.  Lowering taxes would damage the economy.  There is a need to stimulate investment and efficiently spend more stimulus or long term unemployment will result and waste human capital.

President Obama said there will be national foreclosure freeze and was seen as deferring to the financial interests.

Goldman Sach's mortgage servicing unit suspended proceedings in certain cases pending review.

All fifty states and the District of Columbia have launched a joint investigation of the mortgage industry.

Bair (FDIC) said robo-signing is serious, but she opposes a nation wide ban, because it would hurt the housing market.  She has seen no evidence the foreclosure fraud methods were done in small banks.

Bove, a bank analyst, said the banks could lose $80 billion on the mortgage mess.

Mozillo (Countrywide) settled his SEC civil fraud and insider trading case for $67.5 million in fines and restitution while admitting no wrong doing.

NFIB small business confidence was up .2 to 89.0 in September and is still in recession territory.  Job hiring plans were down 4 points in a reversal of prior trend.  Poor sales are still the biggest problem.  More owners expect the economy to weaken rather than strengthen.

U. S. economists (NABE) have cut U.S. growth estimates for 2010 and 2011 to 2.6% from 3.2%

58 million Americans will receive no Social Security inflation adjustment increase for the second year in a row.

Intel after hours reported Q3 EPS was up 58% to 52 cents/share, which was 2 cents above views.  Revenue was up 18% to $11.0 billion (expected $10.99 billion).  Q4 projections straddled market views.

J. P. Morgan Q3 net income was $1.01/share (expected 90 cents) on lower write-offs and less credit reserves, i.e., they lowered their capital reserves and increased profits on the balance sheet switch.

U. S. import prices fell .3% in September; excluding petroleum, prices were up .3%.  Petroleum and fuel fell 3.1% in the first decrease since June.

Realty Trac reported a record number of repossessions  (102,134) in September; first time over 100,000.

McDonald's got a one year delay in compliance with PPACA health insurance rules.  It had expressed worry over part-time workers.

U.S. trade gap went up 8.8% in August; exports went up to a 3 year high but imports were up more.

U. S. wholesale prices went up .4% in September on food and energy; core prices went up .1% for 1.6% vs year ago.

30 year fixed mortgage went down 8 bps to 4.19%; lowest since record collection began in 1971.

Google after hours reported Q3 profit beat estimates; up 30% after special items; ad revenue was up 25%.

New York State Pension System is pulling out of a Morgan Stanley real estate investment commitment, because managers left and poor performance.

CapOne September defaults were up to 8.38% from 8.19%; 30 day delinquencies went down to 4.53% from 4.56%.

New York Fed manufacturing survey (Empire State) was up 12 points ti 15.73 from 4.14; new orders were up to 12.90 from 4.33.

Pimco is selling U. S. Treasuries ahead of QE2.

U. S. retail sales went up .6% in September; ex autos up .4%.

U.S. business inventory was up .6% in August for the eighth month, but sales were only up .1% (in July it was up .8%).

U.S. cotton fell the limit (5 cents) on Friday on a strong dollar after cotton hit record highs on Thursday with heavy Chinese buying with disappointing crops in major producer nations.

Yields on 30 year Treasuries rose the most in four months on Friday on inflation expectations.

Treasury Auctions:

3 year Treasuries, $32 billion, yield .569% (record low), bid to cover 2.946 ( first time below 3 since February 2010), foreign 29% (lowest since June 2009), and direct 12%.

30 year Treasuries, $13 billion, yield 3.852% (first time higher than previous in current trend reversal), bid to cover 2.49 (lowest since February), foreign 32.4% (lowest since March), direct 28.0%.  This was perceived as a very poor auction.


Australian Treasurer, Swan, is worried the rise of the Australian dollar to its highest level since 1983 end of exchange controls (an international agreement which failed) may erode tax revenues and create economic challenges.

Germany opposes extending the payback period of the Greek bailout after comments by the IMF and ECB that it might be conceivable and Greek debt may need to be restructured.  I have said from some time that default is unlikely but the austerity program forced on Greece may necessitate a restructuring of debt in a few years.  Greece borrowing costs went down with the IMF statement it favors giving Greece more time to pay debt and that it would extend loan periods if the eurozone nations did the same.

Greece raised $1.68 billion in a strong auction of 26 week Treasury bills with a yield of 4.54% and a bid to cover of 4.22.

China increased banks required reserve ratios again by 50 bps to 16.5% to further control excessive lending.

China Q3 GDP is unofficially estimated to be 9.5% and September may have risen about 3.5%.

China's September trade surplus went down to $16.9 billion from 20.0 in August; imports went to $24.1 billion from 35.2; exports went to $25.1 billion from 34.4.

Singapore Central Bank tightened its currency (Singapore dollar) trading band and it soared to a record high.

26% of loans (about $300 billion) to Chinese local government financing vehicles (hybrid government companies) are at serious risk of default.  These financing vehicles were used to get around the prohibition against local government borrowing.

World GDP is expected to slow to 4.0% in 2011 from an estimated 4.6% in 2010.

Strikes over changes in the retirement age in France are hardening among unions and students.

UK jobless claims went up 5300 in September for a second straight gain, but the jobless rate fell .1% to 7.7% with most job gains temporary workers.

UK inflation is steady at 3.1% (target is 2%) with food and clothing prices up.

Spanish inflation went up in September to 2.1%.

The eurozone trade deficit was $6 billion in August after a $8.7 billion surplus in July.

Portugal's growth may slow to .2% in 2011 on austerity.

Trichet (ECB) wants tougher rules to punish eurozone countries not maintaining fiscal discipline.

South Korea and Japan both warned the consequences of their currencies continuing to rise could be further currency intervention and expand into protectionism.

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Wednesday, October 13, 2010

Foreclosure Gate: Fixing It, Systemic Risk, & MERS

Mike Konczal has published his fifth piece on Mortgage Fraud for Dummies, entitled "The Necessity of Government Action and Ways Out of the Crisis".  Mortgage servicers are not federally regulated and are subject to a hodge-podge of state regulations.  The servicers need to be taken out of the driver's seat and no excuses allowed.  He holds that it is time for banks and corporations to obey the law and cease profiting from fraud.  The time for the weak and poor, and increasing the middle class, to have a fair say and be protected from the bulldozer of the rich and powerful.  The program needs to be government run, involuntary, and standardized on both the modification and foreclosure end.  He also says it is time to reconsider the investor tax break of REMIC's and disallow them if the loan holding entity forecloses above a set percentage of its mortgages.

Later, Konczal writes on the chain of documentation and the act of foreclosure as delineated by Barry Ritholtz as well as several of posts by other bloggers which he uses to show how serious and well understood the problem is.

In yet another subsequent post, Konczal expands on the systemic risk posed by foreclosure frauds in that the electronic processing may place into question whether there were any properly documented "true sales", which could create a Lehman weekend crisis.  He then briefly mentions MERS which is an electronic processing and tracking service of mortgages and which is deeply involved in the mortgage fraud controversy.

MERS is a company which has NO employees, only officers.  Of these officers, there are an unknown number of corporate Assistant Secretaries (some estimate are in the hundreds, maybe thousands) who sit in their homes scattered across the country attesting to documents by signing them as they are presented to them by MERS without question.  MERS services approximately 60% of U.S. mortgages.  The Washington's Blog post linked in this paragraph goes into the MERS process and the lack of any attempt by the signers to know the facts behind the attestation they make.  MERS is a keystone in the Foreclosure Gate.

Here is an in depth paper written by an attorney, Christopher Peterson, who teaches law at the University of Utah which provides a detailed analysis of MERS and how it operates and ends by questioning whether the democratic governance of the nation's real property recording system has been subverted.  This paper will tell you more than you want to know about MERS.

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Tuesday, October 12, 2010

Foreclosure Gate: Mortgage Fraud Made Simple

In our weekly economic and market commentary, we mentioned Mike Konczal's piece on foreclosure fraud and how to easily understand it:  Foreclosure Fraud for Dummies, 1: The Chains and the Stakes.

His series on this is now up to four articles and they are important enough that if you did not run into them via the link in my weekly commentary, you should definitely read them all thoroughly.

His second piece, What is a Note, and Why is it so Important?, covers the deceptive counter PR campaign by the banks that a correctly filed and produced document is not important, when in fact it is a crucial legal document necessary in a just procedural court.  Beyond that the sellers of mortgaged backed securities are afraid that the trusts set up to hold these securities will force the sellers to repurchase the securities.

In the third piece, Why are Servicers so bad at their Job?, Konczal shows that the problem was in the creation of the securities and the removal of the actual mortgages from the books of banks, who historically had usually sought restructuring rather than foreclosure when the loans were still on their books.  Servicers do transaction processing and handle default situations.  As such they have economic incentives to not negotiate any modification to a good loan. Bankruptcy court records show a problem with documents from servicers beginning in the late 1990's.  Servicers are not subject to the Fair Debt Collections Act and many of the mortgages from the largest banks are second or third mortgages.

In the fourth piece, How could this explode into a Systemic Crisis?, Konczal is concerned that the mortgage insurers do not have the liquidity for a nation-wide halt in foreclosures and Congress might be pressed to act too quickly without proper debate of the issues to bailout the banks and mortgage insurers.  If trustees do not force the depositors and sponsors to purchase mortgages without notes, investors could sue them.  This could encourage tranche warfare between junior and senior tranche holders.  Much of this activity would focus around the four largest banks.  If the insurance market froze and the stock market panicked over the possibility of waves of lawsuits, this could again force Congress to act precipitously without proper consideration to bail them out and possibly abandon individual rights and equal protection under the law.

We have already seen the White House indicate it is ready to back the mortgage insurers and bankers over proper legal procedure and the protection of individual rights.  Konczal will be writing a fifth article how the debate should be formed and fixes found.  In my weekly commentary, I linked to Felix Salmon suggestions on this subject.  It will be interesting to see what Mike Konczal proposes.

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Economy & Market Week Ended 10/8/2010

The unemployment report for August  showed a net loss of 95,000 jobs.  Private employment was up 64,000 but public employment was down 159,000.  The unemployment rate remained unchanged at 9.6%.  The official discouraged worker figure increased to 17.1% up from 16.7% the prior month.  If one used the old 1994 calculation for discouraged workers the number would be closer to 22.8-23%.  The unemployment to population ratio remained unchanged at 58.5% and the labor participation rate was 64.7%.  Part-time involuntary workers increased 612,000 to 9.5 million.  We have long maintained that continued high unemployment is being used to hold inflation down while the financial sector builds its capital ratios back up.  The growing question is why do the rich get bailed out on the backs of the general citizenry?

Gold continues to advance to new highs and silver is at 30 year highs.  There is some market talk to a possible gold resistance line around $1355.  Bottom line, if your local newspaper has articles on owning gold and people in Starbucks are talking about buying gold, it could very well be time to sell and harvest profits.  The use and value of gold is very misunderstood as we have said time and time again.

In the context of gold, consumers should be wary of traveling gold buyers and research local gold buyers for the best price. Along the same line, over a year ago we profiled the VA benefit called the special Aid & Attendance Benefit with the help of an Illinois Department of Veteran's Affairs counselor and how the seminars by "financial advisers" on how to get these benefits, etc are a scam.  No veteran or their family can be charged more then $10 to help get benefits.  VA and State offices are prepared to help veterans and their families obtain benefits and provide information for free.  Those so-called advisers attempt to sell an unnecessary trust with its own checking account and/or annuity and life insurance as well as charge the trust for their services.  When it comes to veteran's benefits always contact the VA or State veteran's offices.

The mortgage Foreclosure Gate continues to unfold and grow with the banks desperately waging a PR and lobbyist campaign to insure the White House will not take any action to protect the American people as is being very well documented on the blog nakedcapitalism.  Many others are also wading into this subject with Mike Konczal's analysis of how the foreclosure fraud is worked and its meaning being a classic must read.  Felix Salmon has made three common sense suggestions for resolving the mess none of which, in my opinion, will be acted upon, because they defeat the profitable purposes of the foreclosure fraud by the banks and the title insurance companies are scared.

John Hussman is his weekly commentary (10/3) emphasized that the economic date we see coming in is mixed and, while it is a bit less negative than expected, it continues "... to deteriorate in a manner consistent with stagnate economic activity".  A look at economic activity of several indices show that the "... data implies tepid growth but not outright contraction".  He maintains that a fresh downturn in the economy is not only a possibility but a likelihood.

Robert Reich had an excellent post on income inequality and how the rich have not only become wealthier but also more politically powerful to the extent that tax cuts, despite being less economically stimulative, for the rich are more important than tax cuts for the other 99% of the citizenry who need the help.

The Small Business Jobs and Credit Act of 2010 has some provisions in it that effect how workers can treat their deferred accounts.  It allows carving out a part of a deferred annuity to create an immediate annuity.  It allows the holder of a 401(k), 403(b), or 457 plan the ability to convert at least part, although in a more limited way than that available to holders of a traditional IRA, to a Roth 401(k).

The meme of uncertainty, which has been so prevalent since June, has temporarily given way to fear of a currency war.  Nations around the world have for some time been defending themselves against the weak dollar and attempting to either boost exports or control prices, interest rates, and investment bubbles.  If this were to get out of hand, the protectionist policies which would ensue and multiply around the world would be economically disastrous.  While China's currency is undervalued, it is also pegged to the U.S. dollar.  In fact, the talk and fear of a currency war serves the same purpose as the uncertainty meme; it is a sideshow, a diversion from the actual problems which exist in different countries, such as China and the United States, which must be dealt with by each country internally with an understanding that there are global, as well as nationally, consequences for right and wrong actions.  If China appreciates the yuan (renminbi), the dollar is devalued.  It would appear that the United States wants a further devaluation of the U.S. dollar beyond that caused by lower interest rates, which has also led to a flood of money into emerging countries driving their exchange rates up.  If the Fed and other central banks around the world are to engage in quantitative easing by buying bonds and mortgages and lower interest rates, the potential global deflation could be staggering.  Quantitative easing may be fine for banks liquidity and profits, but it is not relevant to spurring economic growth.

Market Report:  No banks failed this week.  The unofficial problem bank list is up to 877 banks.

                  DOW/ Volume                                            NASDAQ/Volume

Mon         <78.41>/down 12.8%                            <26.23>/down 1%

Tue           193.45 /up 30.9% (highest vol since 9/1)    55.31 /up 15%

Wed           22.93 /down 20.9%                                 <19.17> /down 1.4%

Thu           <19.07>/down 6.3%                                 3.01  /down 14.4%

Fri               57.90 /up 3.1%                                              18.24/up 7.7%

Week         176.80                                                             31.16

Mon    Oil down 11 cents to $81.47; Dollar stronger
            Weak economic news for the day.
Tue     Oil up 1.35 to 82.82; Dollar weaker
           Market liked Bank of Japan QE plan and 0 to .1% interest rate.
Wed    Oil up 41 cents to 83.23; Dollar weaker but mixed against the pound
            ADP private employment survey was down more than expected; tech stocks were down; oil 
            supplies   were up 3.1 million barrels, gas supplies were down 2.6 million barrels; distillate was                      down 1.1 million barrels.
Thu      Oil down 1.56 to 81.67; Dollar stronger but mixed against the yen
            Teen retailer and luxury sales are up; weekly jobless claims were down 11,000 to 445,000; 4 week
            moving average was down 4000 to 455,750; continuing claims were down 48,000 to 4,462,000.
Fri        Oil was up 99 cents to 82.66; Dollar weaker
             Weak unemployment report <64,000> farm stocks up; market appears to want QE  --- will
             there be a sale off in the market if we get QE in November?

United States:

ECRI Weekly Leading Index at <7.0> up from <7.8>.

Gallup survey shows unemployment up to 10.1% in September in a last 1/2 month surge which was probably not picked up in the BLS unemployment report released this week.

BLS annual job loss revision (February for January 2011 report) preliminary estimate is <366,000>, which means there were that many less jobs than reported during 2010.

U.S. factory orders were down .5% August; ex transportation orders were up .9%.

Pending U.S. home sales were up 4.3% August to 82.3 (still 20 below a year ago).

ISM non-manufacturing index was up to 53.2 from 51.5 (August) which was more than the 52.0 expected; employment was up to 50.2 from 48.2.

Office vacancy rate is at a 17 year high.

According to the American Bankers Association, consumer delinquency rate was 3.00% up from 2.98% in Q2; it had been dropping.

As of June 30, 78 bailed out banks have problems severe enough to threaten survival.

U.S. bankruptcies were down 11% in first 9 months of 2010.

Sanofi-Aventis $69/share offer for Genzyme has turned hostile.

Evans (Chicago Fed) favors more accommodation in the face of continuing high unemployment; Fed might aim to overshoot 2% inflation target temporarily to bring down high cost of credit.

ADP private employment survey is down 39,000 jobs in September (expected up 20,000).

88% of NYSE stocks are overbought as of Wednesday.  There is a massive short accumulation in the Nasdaq 100.

If economic growth is 2% per year, unemployment will grow to 11.9% by 2020; if 3% growth, unemployment will be 45% by 2020; if 6% growth, unemployment will be 5% by 2012.

40% of Americans fear they will run out of money for health care and are delaying retirement.

Joseph Stiglitz said the Fed monetary easing and quantitative easing has created chaos globally in currencies.

U.S. consumer credit in August was up 1.75% annualized; revolving credit decreased 7.25%; non-revolving credit increased 1.25%.

Fisher (Dallas Fed), who opposes QE, said the debate at the next FOMC (Fed Open Market Committee) will still continue.

U.S. city tax revenues are down 3.2% in 2010.

Bullard (St. Louis Fed) said the decision at the next FOMC (Fed Open Market Committee) will be tough, because the economy has slowed but not so much that something should be done.

Bank of America extended its mortgage foreclosure freeze to all 50 states; PNC is halting in 23 states for a month.

Wholesale inventories were up .8% in August.


China has offered to buy Greek bonds and Chairman Wen said China will undertake great effort to support the eurozone.  China is diversifying it's currency holdings.  It has also bought Spanish bonds.

China also said the global financial crisis has demonstrated the need for China to focus on "structural problems" and stimulate domestic demand to stabilize and grow the economy.  Even before the recession, China's economic development lacked balance, coordination, and sustainability according to Chinese officials.

The United Kingdom Accounting and Actuarial Board has opened an investigation into Ernst & Young and its report to the FSA (UK financial regulatory authority).

Bank of Japan announced $418 billion monetary easing program to buy corporate debt as well as government debt and cut interest rates to a range of zero to one-tenth of a percent.

The Markit eurozone services PMI (Purchasing Managers Index) was down to 54.1 September from 55.9; six month low.

Moody's warned it may cut Ireland's credit rating again, citing need for additional austerity.  To me, this appears to be counter productive as Ireland is suffering from austerity which is stagnating growth while publicly bailing out Irish banks to the benefit of shareholders, officers, and bondholders at great expense to GDP.

Australia central bank kept its interest rate at 4.5%.  There is growing concern about the appreciation of the Australian dollar.

The ECB will accept one week deposits to drain excess (?) liquidity from the market; it also stepped up bond purchases with $730 million last week.

Eurozone retail sales were down .4%.

Eurozone wants China to appreciate the yuan (renminbi).

Bank of England held interest rate at .5%; QE is on hold.

ECB held interest rate at 1%.

Estonia's inflation rate is up 4.0% annualized and .8% for the month.

German manufacturing orders were up 3.4% in August on strong foreign demand.  German exports were down .4%; production was up 1.7%; manufacturing output was up 3.4% (primarily cars).

France's trade gap was up in August.

Canadian building permits were down 9.2% by value.

China sold a record 2.02 trillion yen ($24.5 billion) of Japanese debt in August after seven months of buying.

French service sector index was up 1 to 102 in September.

Canadian jobs were down 6600 in September (expected up 10,000) which may indicate jobs growth is faltering; its workforce shrank 11% with unemployment at 8%.

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Saturday, October 9, 2010

The "Invisible Hand" is Risk Aversion

The myth of the Invisible Hand as a part or justification of market theory has become pervasive.  It is used incorrectly to justify self serving conduct as productive of social good and to paint all governmental regulation, without respect to the need to protect rights and maintain a level competitive playing field, as antithetical to a free competitive market.  In fact as Gavin Kennedy, who is a contemporary expert on Adam Smith, has succinctly said, "Smith never wrote anything about ‘how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society's best interest’."  His blog, Adam Smith's Lost Legacy, is well worth reading and this is a list of his blog posts on the Invisible Hand.

The economist, Maxine Udall, ended her recent post, "The (Crippled) Invisible Hand", on the Invisible Hand myth with the above link to Gavin Kennedy.  She very compactly lays out how the myth of the Invisible hand over the last 30 to 40 years has actually crippled the Invisible Hand.  The "Invisible Hand" is mentioned only once in Adam Smith's "The Wealth of Nations".  Gavin Kennedy has written on how the "Invisible Hand" is a metaphor.  Maxine Udall correctly identifies the metaphor as risk aversion. 

Just as I have written on the use of proper risk management by banks and the regulatory process in Canada and the failure and refusal of banks and the regulatory process in the United States to use proper risk management, Maxine Udall has identified the lack of risk aversion promulgated by a mythical competitive market driven by unfettered self-interest a prime mover in the current widening of income inequality and abuse of the public interest by a privileged few who are allowed to engage in risky behavior and keep the profits when they succeed and dump the losses on the public when they go to far:  "A crippled risk-averse invisible hand is not the only reason for the concentration of wealth and power in the financial sector, but it is one of the reasons and an important one. That's why a no-strings, no-pain bailout of the same wonderful guys who gave us the most recent crisis was such a mistake. It amputates the invisible hand of risk aversion. With no down side, they're pretty much free to deliver more of the same. The only solution to this particular aspect of finance is wiser, more risk averse investors; wiser, more risk averse shareholders; and wiser, more risk averse management."

 The unknowing perpetuation of myth is too easily harnessed by those who would purposefully promote illusion of freedom in the fancy dressing of "politically correct" and, consequently, demanded interpretations of historical texts and concepts long debated in a truly free society.  Add over 80% of the money controlled by 1% of the people and you can easily understand why some political candidates and public media mouth pieces are so richly underwritten and lobbyists abound wherever the people's representatives might speak out and take action.

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Thursday, October 7, 2010

Influence Requires Discretion or How Bank's Mortgage Fraud Almost Became Legal

In our Saturday post we mentioned the building firestorm involving apparently fraudulent mortgage foreclosure documents and processes.  Today CNBC made it graphic with an article about a bill on the President's desk which might bail the banks out of the mortgage foreclosure frauds by changing the notarization process and taking it out of the authority of the states.  Subsequently, the White House issued a statement, which morphed the CNBC article, that the bill would not be signed, although the issue would be studied for future appropriate action.  This bill had languished in the Senate Judiciary Committee without hearing until it was removed from the Judiciary Committee on September 27th and passed with a unanimous vote without debate.

As Yves Smith wrote yesterday, this bill was possibly an attempt by the banks to bull doze over state laws and pave a freeway out to institutionalized abuse. 

Today, Yves Smith wrote about Representative Grayson's written request that the Financial Stability Oversight Council investigate banks failure to adhere to contractual and legal requirement in the mortgage and mortgage backed securities markets as a systemic risk.  While Yves Smith quotes Felix Salmon on where the foreclosure mess is heading, her naked capitalism blog has, and I trust will, paid extensive attention to these mortgage foreclosure frauds and the fundamental damage it is doing to individual liberties and the legal process. 

President Obama needs to clearly and fundamentally define his position going forward as one which favors the American people and the protection of their inalienable rights to life, liberty, and the pursuit of happiness, which in 18th Century term meant the opportunity to provide food, clothing, and shelter for one's family as opposed to protecting the powerful monied interests of the financial banking empire at the expense of the common citizen.

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Currency Wars

In our last post we noted that Brazil's finance minister commented on a global currency war.  His comment has elicited an avalanche of international comment, including the IMF and World Bank.  We have been commenting for almost two years that a weak U.S. dollar is a burden on developing countries.  A weak dollar combined with low interest rates is economic warfare.  For some time Switzerland has been intervening to lower the value of the Swiss franc.  South Korea, Australia, Brazil, China, and recently, Japan, have, among others, bought U. S. dollars or otherwise taken action to protect its currency and control asset prices.  A weak dollar combined with low interest rates forces investments in growing countries which drives their currency and asset prices up.  The Chinese currency is known to be undervalued as well as pegged to the U.S. dollar.  Consequently, any appreciation of the Chinese renminbi is a devaluation of the U. S. dollar.

We have previously discussed Chinese and American military interests in economic warfare.

There have been numerous studies and articles on U.S. and Chinese imports/exports and the weak dollar and appreciation of the Chinese currency.  There does not appear to be any appreciable benefit to the United States for the renminbi to be appreciated in value with respect to either exports or jobs.  Any lost Chinese exports would go to other Southeast Asian countries and would most likely cause increased prices in the United States rather than increase internal production.  U.S. import levels are likely to remain as they are implying needed internal consumption within a slow growth economy.  Lost export jobs in China could conceivably be more disruptive as difficult rebalancing for internal service and production jobs from export, interest rates, and shift of income from corporations, finance, and real estate to households.

The verbal intensity of this issue runs the risk of masking the real problems within the United States and within China and how they are contributing to the global current account imbalances problem.  To a degree, there are always currency "wars"; it is only when they escalate into a mutually destructive tariff war or a currency crisis does it become a financial crisis conflict.

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Saturday, October 2, 2010

Economy & Market Week Ended 10/1/2010

In the prior week, we saw GMAC (Ally Financial) put foreclosures on hold.  This week we saw J. P. Morgan and Bank of America do the same.  In addition to investigations by numerous state attorney generals, J.P. Morgan Chase, Bank of America, Citibank, HSBC, PNC Bank, U. S. Bank, and Wells Fargo have been contacted by the Comptroller of the Currency about their foreclosures procedures.  The problems, as we have previously outlined, revolve around automatic processing of foreclosure documents requiring a personal knowledge affidavit, misrepresentations in court, and the sudden appearances of loose title transfer signatures (allonges) which are required to be permanently affixed to the mortgage documents.  Yves Smith of naked capitalism has done several posts on this subject both before and after this post.  She has also documented how Florida's special Foreclosure Courts staffed by retired judges are a disgusting example of injustice and lack of proper judicial procedure in steam rolling foreclosures forward over truth and rights to due process.  Foreclosure mill law firms and judges have been presenting and accepting improperly executed documents and fraudulent information, because the banks and mortgage holders do not want to take the time to properly and legally document ownership and provide the personal knowledge review legally required.

In the prior week we had commented on NBER (National Bureau of Economic Research) had declared the recession over in June 2009 and that some economists were remarking that NBER usually waited for at least one or two economic indicators to recover to pre-recession levels before making such a determination, but this pronouncement was made with no indicators having recovered.  Hussman in his weekly commentary last Monday focused on the supplemental downloadable data provided by NBER and shows that with respect to GDP (Gross Domestic Product) we are not out of the woods yet.  His analysis of unemployment shows continued job pressure going forward and oncoming economic weakness.  While presently defensive, he stressed that his investment style is long term.

Paul Krugman has continued his argument that the Chinese currency (renminbi) is undervalued and requires U. S. political action in the form of tariffs, because diplomacy has failed.  Michael Pettis has continued to argue that China has a complicated internal problem of currency, savings, interest rates, wages, and consumption which present a situation in which the political choices are not good given the double edged sword of any attempt to rebalance internally will create very difficult improvements versus economic hardships in any choice of how or what to rebalance.  It very much appears China does not understand the position of the United States and Europe and the United States and Europe do not understand or appreciate the internal economy of China.

What is totally lost in much of the discussion about appreciating the value of the renminbi is that such an appreciation would result in a devaluation of the U.S. dollar.  Is this what the current administration wants --- a devaluation of the U.S. dollar?  without Treasury or Federal Reserve action?  A weak dollar is not going to fuel exports from the U.S. and it will increase prices in the U.S.  Tariffs on imports will only add to the price increases.  The global economy does not need China's growth shattered by disruptive internal imbalances.  The weak dollar is driving up the price of oil without strong economic growth or demand.  Gold is at an all time high and silver at a thirty year high while the stock market has been going up during the month of September.  Market correlations seem to have become obsolete and non-existent.

TARP will end tomorrow, but the outstanding bailouts will continue.  Many financial sector analysts are bemoaning the end of TARP seeing it as an underrated federal program despite its favoritism of financial banks profitability at the expense of the cost to the American people and the high long term continuation of unemployment.  Some analysts would like to see it available to bailout states and municipalities despite not having any legal authority to use TARP money and programs for such a purpose.  Treasury still insists TARP will be profitable, although the number of banks delinquent in dividend payment has risen.

The U.S. Treasury is considering converting its preferred stock to common as a means to gradually sell the common stock and exit AIG.  It would convert approximately $49.1 billion of preferred to 1.66 billion common shares at a loss of about $6.6 billion, which would dilute current common shareholders to 7.9% from 20%, but they will receive warrants for common shares at $45 strike.  There was no explanation of why warrants will be issued.

Back in April we detailed how Ireland's bailout of its banks with a bad bank was done for the benefit of creditors and at the expense of the taxpayer, i.e., it was an example of a "bad" bad bank.  This week saw the Irish banks bailout heating up effecting bond spreads in Europe and increasing default speculation.  While the Irish government was considering how the bailout should be modified, there were unconfirmed reports early in the week from Germany that the ECB had considered a bailout plan for Ireland but decided against it.  This report pushed yields of Irish  banks debt up.  Then Moody's cut the debt rating of Allied Irish, which is a bank which was not even included in the European stress test.  It should be noted that the European bank stress test also did not include real estate mortgages (and Ireland's difficulty is partially the result of a real estate bubble) in the tests.  While Ireland has been the poster child for European imposed austerity, which has significantly lowered Ireland's economic growth, its people have been remarkably quiescent.  By the end of the week, the Irish government had announced it would cost up to $68 billion to bailout Anglo Irish and Allied Irish (with both now nationalized with the nationalization of Allied Irish) or 32% of Ireland's GDP.  The Irish citizenry has begun to publicly question the burden being placed upon them and some are calling for new elections.

Civil demonstrations and strikes are spreading across Europe and, with respect to strikes, there is obvious international coordination.  Romania had police officers and other unions protesting cuts in salaries and pensions and a government minister resigned.  Protests and strikes in France against pension reforms are expected to resume.  Wage pressures and potential union action in Germany is heating up.  We should see more strikes and protests in many European countries in the next two months.  The question is to what extent social unrest will be controlled or spread as the UN has forecast; yet, the IMF wants more austerity.  In the meantime, one eurozone sovereign bond after another appears to be "chiseled" out and demoted by the "market" to higher yields and larger spreads on speculation, while European economic and ECB officials hold the rope without attempting to pull it in to safety, while asserting united action as if they were one.

Market Report: 2 banks failed = 129 for year
                   DOW/Volume                                    NASDAQ/Volume
Mon            <48.22>/ down 14.1%                         <11.45>/down 14.3%
Tue               46.10   / up 12.1%                                  9.82  / up 13.1%
Wed            <22.86>/ down 1.8%                             <3.03>/down 1.0%
Thu              <47.23>/ up 27.0% (distribution day)     <7.94>/ up 12.6%
Fri                 41.63   / down 15.6%                             2.13  / down 19.9%

For Week     <19.38>                                                <10.47>
The market was up Tuesday on bad economic news and down Thursday on good economic news.

Mon   Oil was up 3 cents to 76.52; Dollar stronger but mixed against the pound
           economic business/manufacturing activity shows slowing
Tue     Oil  down 34 cents to 76.18; Dollar weaker but mixed against the pound
           poor economic news; Green Mountain Coffee down after hours on news SEC investigation
           into inventory/revenue recognition
Wed   Oil up $1.68 to 77.86; Dollar weaker
           protests and strikes across Europe
           Oil supplies down 500,000 barrels, gas supplies down 3.5 million barrels, distillate supplies down
           1.9 million barrels
Thu     Oil up $2,11 to 79.97; Dollar weaker but mixed against the pund
           market down on good economic news
           weekly jobless claims down 16,000 to 453,000, 4 week moving average down 6250 to 458,000,
           continuing claims down 86,000 to 4,457,000
Fri       Oil up $1.61 to 81.58; Dollar weaker
            National Institute of Supply Management Purchasing Manager's Index (ISM PMI) down from prior
            month (economy slowing)

In the United States:

National ISM PMI (Institute of Supply Management Purchasing Manager's Index)  fell to 54.1 from 56.3; new orders fell to 51.1 from 53.1; inventories at factories are growing.  This shows growth, but confirms slower growth.

The ECRI WLI (Weekly Leading Indicators) improved to <7.8> this week from last week's <8.7>.  <10> is considered recessionary.  This shows contraction but improving growth.

U.S. consumer spending for August was up .4% (expected .3) and core (without food or energy prices included) PCE (Personal Consumption Expenditures) was up .1%.  Real PCE, annualized, was up .2%.  Personal income was up .5% (expected .3), but the increase was due to a one month boost in jobless benefits.

Chicago ISM PMI was up to 60.4 from 56.7; new orders were up to 61.4 from 55.0.  This is showing better than expected growth.  It is also the 12th straight month of expansion for this regional index.

Kansas City Fed manufacturing index September production up to 14 from zero; new orders were up to 10 from <1>.  This regional index is also showing stronger than expected growth.

U.S. Q2 GDP was revised up to 1.7% from 1.6%.

U.S. truck tonnage was down 2.7% in August, which indicates slowing growth.

Case-Schiller 20 city price index, which is a three month average, was up 3.2% and down .1% seasonally adjusted.  The price decline which began in July will not be apparent until the October report.

Bank analyst, Meredith Whitney, expects states to be the next credit crisis and has released a study through her consulting firm.  She also said she expects bank earnings in Q4 to be lower ("hammered") from lower trading revenue and a double dip in housing.

The Treasury missed the deadline to sell all of its Citi shares as the Citi share price fell and treasury slowed sales.

Dallas Fed Texas manufacturing index for September was mixed with production up to 4.0 from <.1> but new orders up to <3.0> from <9.3>, which indicate new orders are still in contraction.

Southwest is buying AirTran for $3.4 billion and picking up its gates.

FDIC is delaying the authority to dismantle large financial companies in order to give regulators and financial industry more time to study how it will work.

Unilever is buying AlbertoCulver for $5.7 billion.

Chicago Fed economic activity for August down to <.53> from <.11>, which shows increased, but marginal, contraction.

Walmart made an offer to buy South African company Massmart for $4.25 billion.  Massmart is the largest basic food wholesaler in Africa and the third largest distributor of consumer goods as well as a leading retailer in Africa.

FDIC set rules to require banks selling securitized assets to keep 5% of the product on their balance sheet and to use asset backed securities of failed banks to repay taxpayers or depositors at the expense of securities buyers.

Employers can expect to pay 9% more in 2011 for health care cost (biggest increase in 5 years); employees cost is expected to rise 12%.  We are also seeing insurance companies dropping health insurance completely (Principal), withdrawing from some states, and dropping policies for individual children with the mandate to provide insurance to a previously uninsurable child.  The PPACA but costs before benefits and the insurance companies are going to pick where and what they provide and make more money doing it.

The IRS will no longer mail tax forms and instructions to taxpayers beginning with 2010 taxes in 2011.  They claim only approximately 11 million people actually submit paper forms not submitted through preparers or electronically.  The forms will be available over the internet from the IRS website and post offices.

The Fed, if quantitative easing is resumed (QE2), may continue large purchases of long term Treasuries or it may make smaller purchases with amounts set at each FOMC (Federal Reserve Open Market Committee).

The Richmond Fed manufacturing activity index was down to <2> from 11; new orders were down to zero from 10 seasonally adjusted.  This is the first drop in seven months.

Tuesday morning Apple opened down 5.7% for no apparent reason, although several possible reasons were floated.  Also on Tuesday, the market was heading down when at 9:01 Central time there was a large volume spike, for no known reason, and the market started heading back up.  After hours on Tuesday, Green Mountain Coffee fell 15% on possible SEC investigation of revenue recognition in relation to its one cup inventories.

AIG is nearing sale of two Japanese insurance companies to Prudential for $4.8 billion.

U.S. Treasury will sale $2.2 billion of Citi TRuPS (trust preferred securities) received for guaranteeing assets.  The guarantee was terminated in December 2009.

Blair (FDIC) wants higher minimum reserve ratios (insurance funds balance to insured deposits)  --- currently 1.35 with the Dodd-Frank bill; even 2% would not insure banks would have enough insurance assessment in a crisis.

GM monthly auto sales were up 22.1%.  Auto sales vs year ago: GM up 10.5%, Ford up 46%, Chrysler up 61%, and Toyota up 17%.

New HP CEO, Leo Apotheker, who was SAP CEO for 7 months before resigning after consumer complaints about increases in maintenance fees, said HP's focus should be software.  HP stock went down3% on Friday at the beginning of the market.

Late Thursday night, Congress passed an extension of the high cost Fannie/Freddie/FHA loan limits of $729,750.

Banks are doing away with proprietary trading desks, but proprietary traders are going to direct customer trading desks.  Just changing names?

Rosengren (Boston Fed) said unemployment reflects general decline across all industries and expansion of Fed reserves may signal determination to reduce disinflationary pressures.  It is his firm view that policymakers should implement policies consistent with achieving full employment and appropriate level of inflation.

Plosser (Philadelphia Fed) opposes more asset purchases for feat it will create public expectation of Fed monetizing the deficit.  He expects U.S. growth of 3-3.5% in the next two years.  He expects hiring to pick up in 2011 but remain along sectoral, geographic problematic skill imbalances.

Kocherlakota (Minneapolis Fed) revised his GDP estimate to 2.4% in second half of 2010 and 2.5% in 2011.

Evans (Chicago Fed), who supports QE2, said "... optimal policy response at zero-bound is to lower the real interest rate, almost surely by employing unconventional policy tools.  Theory also indicates that, in the absence of such policy stimulus, the factors that generate high risk aversion could very well stifle a meaningful recovery, keep unemployment high and reinforce disinflationary pressures --- clearly undesirable equilibrium."

Pinalto (Cleveland Fed) said growth is too slow to reduce stubborn unemployment and she is assessing effectiveness of Fed tools.

Bernanke said it is not uncommon for recovery after a financial crisis to be slow.

Dudley (New York Fed) said more Fed easing warranted if the economic outlook does not change.

U. S. Treasury auctions:

2 yr Treasury, $36 billion, yield .441%, bid to cover 3.82, foreign 39.0%, direct 10.78%.

5 yr Treasury, $35 billion, yield 1.26%, bid to cover 2.96, foreign 50.1%, direct 8.7%.

7 yr Treasury, $29 billion, yield 1.89% (record low), bid to cover 3.04, foreign 50.24%, direct 13.38%.


Japan's recovery slowing again and another $55 billion stimulus being considered with no plans on how it would be use released.

Bank of Korea intervened to lower its currency (the won) by buying U.S. dollars.

Brazil's finance minister warned of a global currency war.

Europe's central banks have slowed gold sales for year ended 9/26 under Central Banks Gold Agreement (CBGA) to 62 tons down 96% from 2004-2005 497 tons.  It is expected that the CBGA cap will keep sales low.

China imposes a tariff on U.S. poultry imports.

Bank of England Governor Charles Bean gave a speech demanding savers start spending and stop living off income in low interest rate environment.

UK GDP Q2 remained unchanged at 1.2%.

French consumer spending was down 1.6% August (it was up 2.7% in July).

ECB is not renewing emergency lending programs which mature this week and Q4 in order to wind down.

HSBC's China PMI up to 52.9 in August from 50.0.

Official Chinese government PMI up to 53.8 from 51.7.

German retail sales in August down .2%.

UK PMI down to 53.4 from 53.7.

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