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%.

International:

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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